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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
o   Preliminary Proxy Statement
o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ   Definitive Proxy Statement
o   Definitive Additional Materials
o   Soliciting Material Pursuant to §240.14a-12
 
KB HOME
 
(Name of Registrant as Specified In Its Charter)
 
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ   No fee required.
o   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)   Title of each class of securities to which transaction applies:
 
     
     
 
 
  (2)   Aggregate number of securities to which transaction applies:
 
     
     
 
 
  (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
 
     
     
 
 
  (4)   Proposed maximum aggregate value of transaction:
 
     
     
 
 
  (5)   Total fee paid:
 
     
     
 
o   Fee paid previously with preliminary materials.
 
o   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)   Amount Previously Paid:
 
     
     
 
 
  (2)   Form, Schedule or Registration Statement No.:
 
     
     
 
 
  (3)   Filing Party:
 
     
     
 
 
  (4)   Date Filed:
 
     
     
 


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(KB HOME FRONT COVER)

 


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(KB LOGO)
 
KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
 
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March 5, 2010
 
Dear Fellow Stockholder:
 
Your officers and directors join me in inviting you to attend the 2010 Annual Meeting of Stockholders of KB Home at 9:00 a.m., Pacific Time, on April 1, 2010 at The Wedgewood Ballroom at The Fairmont Miramar Hotel in Santa Monica, California.
 
The expected items of business for the meeting are described in detail in the attached Notice of 2010 Annual Meeting of Stockholders and Proxy Statement. We also will discuss our 2009 results and our plans for the future.
 
We look forward to seeing you on April 1.
 
Sincerely,
 
-s- Jeffrey T. Mezger
 
Jeffrey T. Mezger
President and Chief Executive Officer


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(KB LOGO)
 
Notice of 2010 Annual Meeting of Stockholders
 
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Time and Date:
  9:00 a.m., Pacific Time, on Thursday, April 1, 2010.
     
Location:
  The Wedgewood Ballroom, The Fairmont Miramar Hotel, 101 Wilshire Boulevard, Santa Monica, California 90401.
     
Agenda:
 
(1)  Elect nine directors, each to serve for a one-year term;
     
   
(2)  Ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm;
     
   
(3)  Approve the KB Home 2010 Equity Incentive Plan;
     
   
(4)  Consider three stockholder proposals, if properly presented at the meeting; and
     
   
(5)  Transact any other business that may properly come before the meeting or any adjournment or postponement of the meeting.
     
    The accompanying Proxy Statement describes these items in more detail. We have not received notice of any other matters that may be properly presented at the meeting.
     
Record Date:
  You can vote at the meeting and at any postponement or adjournment of the meeting if you were a stockholder of record on February 10, 2010.
     
Voting:
  Please vote as soon as possible, even if you plan to attend the meeting, to ensure that your shares will be represented. You do not need to attend the meeting to vote if you vote before the meeting. If you are a holder of record, you may vote your shares via mail, telephone or the Internet. If your shares are held by a broker or financial institution, you must vote your shares as instructed by your broker or financial institution.
     
Annual Report
  Copies of our Annual Report on Form 10-K for the fiscal year ended November 30, 2009 (the “Annual Report”), including audited financial statements, are being made available to stockholders concurrently with our Proxy Statement. We anticipate that these materials will first be made available on or about March 5, 2010.
 
Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting To Be Held on April 1, 2010: Our Proxy Statement and Annual Report are available online at www.kbhome.com/investor/proxy.
 
 
By Order of The Board of Directors,
 
 
-s- Wendy C. Shiba
Wendy C. Shiba
Executive Vice President, General Counsel and Secretary
Los Angeles, California
March 5, 2010


 

             
           
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Admission to the Annual Meeting
 
Due to space limitations at the Annual Meeting location, we must limit attendance to only stockholders of record on February 10, 2010, authorized proxy holders of stockholders of record on February 10, 2010, individuals who have been designated to present a stockholder proposal, and a few invited guests of the Board of Directors. Non-transferable admission tickets for the Annual Meeting will be distributed on a first-come, first-served basis, and we cannot guarantee admission for all stockholders. An admission ticket and picture identification (such as a valid driver’s license or passport) will be required to enter the Annual Meeting. A professional business dress code will be observed at the Annual Meeting.
 
If you are eligible and wish to attend the Annual Meeting, please send your request for an admission ticket in writing to William A. Richelieu, Assistant Corporate Secretary, KB Home, 10990 Wilshire Boulevard, 7th Floor, Los Angeles, California 90024. All requests must be in writing and received on or before Friday, March 19, 2010 and include the following information:
 
       
If you are a stockholder of record     If you are a beneficial stockholder
       
 
•   A copy of a proxy card or notice showing stockholder name and address;
 
•   Name, mailing address and contact telephone number of an authorized proxy representative, if one is appointed, plus a copy of the signed legal proxy; and
 
•   The complete address where your admission ticket should be mailed.
 
   
 
•   A copy of a brokerage account voting instruction card showing stockholder name and address, or a broker letter verifying record date ownership;
 
•   A copy of a brokerage account statement showing KB Home stock ownership on the record date; and
 
•   The complete address where your admission ticket should be mailed.
 
       
 
Please note any special assistance needs in your admission ticket request. Once your request is processed, an admission ticket will be sent to you by mail to the address given.


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(KB LOGO)
KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000
 
Proxy Statement
for the
2010 Annual Meeting of Stockholders
 
         
         
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General Information
 
What Is This Proxy Statement For?
 
Your Board of Directors (the “Board”) is furnishing this Proxy Statement to you to solicit your proxy for our 2010 Annual Meeting of Stockholders. The items of business for the Annual Meeting are described in the accompanying Notice of 2010 Annual Meeting of Stockholders. This Proxy Statement contains information to help you decide how you want your shares to be voted. We anticipate that this Proxy Statement and the form of proxy will first be made available on or about March 5, 2010.
 
Who Can Vote?
 
Holders of record of the 76,836,444 shares of common stock outstanding at the close of business on the record date (February 10, 2010) are entitled to one vote for each share held. The trustee of our Grantor Stock Ownership Trust (the “GSOT”) will vote the 11,217,051 shares the GSOT held on the record date based on the instructions received from our employees who hold unexercised options under our employee equity compensation plans. Accordingly, a total of 88,053,495 shares are entitled to vote at the Annual Meeting. There is no right to cumulative voting.
 
     
 
 
Attending the Annual Meeting
 
Date:
  Thursday, April 1, 2010
 
Place:
 
 
The Wedgewood Ballroom
The Fairmont Miramar Hotel
101 Wilshire Boulevard
Santa Monica, CA 90401
 
To Attend:
 
 
You must have an admission ticket and a valid photo ID, as described above on page i. A professional business dress code will be observed. Parking is available at the meeting location. You may be subject to a security check.
 
Note:
 
 
No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted at the Annual Meeting. Additional rules of conduct will apply at the meeting.
 
     

 
 
Who is a “Holder of Record”?
 
If your shares are registered directly in your name with our transfer agent, Mellon Investor Services LLC, you are considered the “holder of record” of those shares.
 
If your shares are held in a stock brokerage account or by a financial institution or other holder of record, you are a beneficial owner of those shares held in “street name.” If you are a beneficial owner, for ease of reference, this Proxy Statement will use the term “broker” to describe the person or institution that is the holder of record of your shares.
 
Proxy Solicitation Costs
 
We will pay the cost to solicit proxies for the Annual Meeting. In addition to this Proxy Statement, our officers, directors and other employees may solicit proxies personally or in writing or by telephone, facsimile or email for no additional compensation. We will, if requested, reimburse banks, brokerage houses and other custodians, nominees and certain fiduciaries for their reasonable expenses in providing material to their principals. We have hired Georgeson Inc., a professional soliciting organization, to assist us in proxy solicitation and in distributing proxy materials. For these services, we will pay Georgeson a fee of $9,000, plus reimbursement for out-of-pocket expenses.

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Voting Information
 
Quorum Requirement For stockholders to take action at the Annual Meeting, a majority of the shares of our common stock outstanding on the record date must be present or represented at the Annual Meeting. Abstentions and “broker non-votes” are counted for this purpose.
 
Broker Non-Votes A “broker non-vote” arises when a broker does not receive instructions from a beneficial owner and does not have the discretionary authority to vote on an item. For this Annual Meeting, we understand that brokers have discretionary authority to vote only on the proposal to ratify the appointment of our independent registered public accounting firm.
 
Director Voting Notice In the past, brokers had discretionary authority to vote in the election of directors if they did not receive instructions from a beneficial holder. Due to a New York Stock Exchange (“NYSE”) rule change, brokers do not have this discretionary authority effective January 1, 2010. Accordingly, if you are a beneficial owner, you must instruct your broker on how you want your shares to be voted in the election of directors in order for your shares to be counted in the election.
 
Proxy Voting Holders of record may vote by proxy via mail, telephone or the Internet as described on the proxy materials provided to you. If you are a beneficial owner, your broker should send you proxy voting materials and instructions, and may do so electronically.
 
Voting at the Annual Meeting Holders of record (or someone designated by a signed legal proxy) may vote in person at the Annual Meeting. If you are a beneficial owner, you must obtain a legal proxy from your broker and present it with your ballot. Voting at the Annual Meeting will replace any prior proxy voting.
 
Voting By Named Proxies The named proxies for the Annual Meeting – Jeffrey T. Mezger and Wendy C. Shiba (or their duly authorized designees) – will follow submitted proxy voting instructions. They will vote as the Board recommends as to any submitted instructions that do not direct how to vote on any item, and will vote on any other matters properly presented at the Annual Meeting in their judgment.
 
Closing of Polls Polls will close at approximately 9:30 a.m., Pacific Time, on April 1, 2010. Holders of record may vote via Internet and telephone until 11:59 p.m., Eastern Time, on March 30, 2010. Proxy voting instructions for shares held by the KB Home Common Stock Fund in our 401(k) Savings Plan or the GSOT must be received by 11:59 p.m., Eastern Time, on March 29, 2010. Each broker sets proxy voting deadlines for its beneficial owners.
 
Changing Your Vote Holders of record may revoke proxy votes at any time before polls close by submitting a later vote (a) in person at the Annual Meeting, (b) via mail, telephone or the Internet before the above-listed deadlines, or (c) to our Corporate Secretary at the address listed below under the heading “Corporate Governance Highlights” by our close of business on March 30, 2010. If you are a beneficial owner, you must contact your broker to revoke any prior voting instructions. There are no dissenters’ rights or rights of appraisal with respect to any item to be acted upon at the Annual Meeting.
 
Votes Required to Approve or Adopt Proposals Election of Directors. To be elected, each director nominee must receive a majority of votes cast in favor (i.e., the votes cast for a nominee’s election must exceed the votes cast against the nominee’s election). Shares that are not present or represented at the Annual Meeting and abstentions will not affect the election outcome.
 
Other Proposals: Approval of each of the other proposals requires the affirmative vote of a majority of the shares present or represented, and entitled to vote thereon, at the Annual Meeting. Abstentions will have the same effect as an “against” vote. Broker non-votes will affect only the proposal to approve the 2010 KB Home Equity Incentive Plan, where they will have the same effect as an “against” vote if the total votes cast on the proposal do not exceed 50% of the shares of our outstanding common stock.
 
Inspectors of Elections We have engaged our transfer agent to count the votes and act as an independent inspector of election. William A. Richelieu, Assistant Corporate Secretary, will also act as an inspector of election.

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Corporate Governance and Board Matters
 
 CORPORATE GOVERNANCE
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•   Ten current Board members – nine independent members, including an independent Non-Executive Chairman
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•   Full Board elected annually using a majority vote standard
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•   Standing Board Committees are entirely composed of independent directors
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•   All incumbent directors standing for re-election attended at least 75% of Board-related meetings
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•   Non-employee directors are subject to an equity ownership requirement during their Board service
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•   Our Certificate of Incorporation, By-laws, Corporate Governance Principles, Charters for all Board
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Committees, and Ethics Policy are available online at www.kbhome.com/investor/corporategovernance
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•   As set forth in our Corporate Governance Principles, any interested party may write to the Board,
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the Non-Executive Chairman of the Board or to any non-employee director in care of our
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Corporate Secretary at KB Home, 10990 Wilshire Boulevard, Los Angeles, CA 90024.
     
 
Role of the Board of Directors
 
The Board is elected by our stockholders to oversee the management of our business and to assure that the long-term interests of our stockholders are being served. The Board carries out this role subject to Delaware law and our Certificate of Incorporation, By-laws and Corporate Governance Principles.
 
Corporate Governance Principles
 
Our Corporate Governance Principles provide a framework within which we conduct our business and pursue our strategic goals. The Nominating and Corporate Governance Committee regularly reviews our Corporate Governance Principles, and the full Board approves changes as it deems appropriate.
 
Ethics Policy
 
We expect all of our directors and employees to follow the highest ethical standards when representing KB Home and our interests. To this end, all employees, including our senior executive management, and our directors must comply with our Ethics Policy. The Audit Committee regularly reviews our Ethics Policy and approves changes that it deems necessary or appropriate. The Audit Committee approved changes to our Ethics Policy that became effective as of October 16, 2009.
 
Executive Sessions of Non-Employee Directors
 
As part of the Board’s regularly scheduled meetings, the non-employee directors meet in executive session. Any non-employee director can request additional executive sessions. Stephen F. Bollenbach, the Non-Executive Chairman of the Board, schedules and chairs the executive sessions.
 
Board Membership
 
As of the date of this Proxy Statement, the Board has ten members. Except for Mr. Mezger, our President and Chief Executive Officer (“CEO”), no director is an employee.
 
Board Committees
 
Three standing Board Committees assist the Board:
 
  •   Audit and Compliance (“Audit Committee”)
 
  •   Management Development and Compensation
(“Compensation Committee”)
 
  •   Nominating and Corporate Governance
(“Nominating/Governance”)
 
The Board appoints the members of and has adopted a charter for each Committee. The Board and each Committee conducts an annual evaluation of its performance.
 
Board Meetings and Attendance
 
The Board and Board Committees hold regular meetings on a set schedule and may hold interim meetings and act by written consent from time to time as necessary or appropriate. The Board held five meetings in our 2009 fiscal year. Mr. Bollenbach, as the Non-Executive Chairman of the Board, presides over all meetings at which he is present.
 
In our 2009 fiscal year, each director attended at least 75% of the meetings of the Board and the Board Committees on which he or she served. We expect directors to attend our annual stockholder meetings. All directors serving at the time attended our 2009 Annual Meeting of Stockholders, which was held on April 2, 2009.

 

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Board Leadership Structure and Risk Oversight
 
The Board believes that separate individuals should hold the positions of Chairman of the Board and Chief Executive Officer, and that the Chairman should not be an employee. The Board has been led by an independent Non-Executive Chairman since 2007. Under our Corporate Governance Principles, the Chairman of the Board is responsible for coordinating the Board’s activities, including the scheduling of meetings and executive sessions of the non-employee directors and the relevant agenda items in each case (in consultation with the Chief Executive Officer as appropriate). The Board believes this leadership structure has enhanced the Board’s oversight of and independence from our management, the ability of the Board to carry out its roles and responsibilities on behalf of our stockholders, and our overall corporate governance compared to our prior combined Chairman/Chief Executive Officer leadership structure.
 
The Board has delegated its risk oversight responsibilities to the Audit Committee as described below under the heading “Board Committee Responsibilities and Related Matters – Audit Committee.” In accordance with the Audit Committee’s Charter, each of our senior financial and accounting, legal and internal audit executives report directly to the Audit Committee regarding material risks to our business, among other matters, and the Audit Committee meets in executive sessions with each such executive and with representatives of our independent registered public accounting firm. The Audit Committee Chair reports to the full Board regarding material risks as deemed appropriate.
 
Board Committee Composition and 2009 Fiscal Year Meetings
 
The chart below shows the current members of the standing Board Committees as of the date of this Proxy Statement and the number of meetings each Board Committee held during our 2009 fiscal year. Mr. Mezger does not serve on any Board Committees.
 
                   
                 
Nominating/
Director     Audit     Compensation     Governance
Stephen F. Bollenbach
          X     X
                   
Ronald W. Burkle
                X
                   
Timothy W. Finchem
    X     X      
                   
Kenneth M. Jastrow, II
                X
                   
Robert L. Johnson
    X            
                   
Melissa Lora
    Chair           X
                   
Michael G. McCaffery
    X     Chair      
                   
Leslie Moonves
                Chair
                   
Luis G. Nogales
    X     X      
                   
Number of Meetings:
    9(a)     5     4
                   
 
(a) Includes conference calls with our management to review our quarterly earnings releases prior to their issuance.
 
Board Committee Responsibilities and Related Matters
 
The Board has delegated certain responsibilities and authority to each Board Committee as described below. At each regularly scheduled Board meeting, each Board Committee Chair (or another designated Board Committee member) reports to the full Board on his or her Board Committee’s activities.
 
Audit Committee. The Audit Committee is responsible for general oversight of our (a) accounting and reporting practices; (b) internal control over financial reporting and disclosure controls and procedures; (c) audit process, including our independent registered public accounting firm’s qualifications, independence, retention, compensation and performance, and the performance of our internal audit department; and (d) compliance with legal and regulatory requirements and management of matters in which we have or may have material liability exposure. In addition, the Audit Committee may act for the Board to authorize us or our subsidiaries or affiliates to incur, guarantee or redeem debt or debt securities.

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The Audit Committee also oversees the preparation of a required report to be included in our annual proxy statement and is charged with the duties and responsibilities listed in its charter. The Audit Committee’s report is provided below under the heading “Audit and Compliance Committee Report.” The Audit Committee is a separately designated standing audit committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934.
 
The Board has determined that each current member of the Audit Committee is independent under our Corporate Governance Principles (as described below under the heading “Director Independence”), NYSE listing standards and Securities and Exchange Commission (“SEC”) rules. The Board has also determined that each current member of the Audit Committee is financially literate under NYSE listing standards, and that Ms. Lora qualifies as an “audit committee financial expert” under SEC rules.
 
Compensation Committee. The Compensation Committee is responsible for (a) the evaluation and compensation of our CEO; (b) the compensation of our senior executive management (other than our CEO), which consists of our CEO’s direct reports and any designated “executive officers” (as that term is defined in Rule 3b-7 of the Securities Exchange Act of 1934); (c) oversight of our efforts to attract, develop, promote and retain qualified senior executive management; and (d) the evaluation and determination of non-employee director compensation and benefits. The Compensation Committee oversees the preparation of the compensation discussion and analysis to be included in our annual proxy statement, recommends to the Board whether to so include the compensation discussion and analysis, provides an accompanying report to be included in our annual proxy statement, and is charged with the duties and responsibilities listed in its charter. The compensation discussion and analysis for this Proxy Statement is provided below under the heading “Compensation Discussion and Analysis,” and the Compensation Committee’s report is provided below under the heading “Management Development and Compensation Committee Report.”
 
The Board has determined that each current Compensation Committee member is independent under our Corporate Governance Principles and NYSE listing standards, is a “non-employee director” under SEC rules and is an “outside director” under Section 162(m) of the Internal Revenue Code (the “Code”).
 
Overview of Executive Officer and Non-Employee Director Compensation Processes and Procedures.  Under our By-laws, the Board has the authority to fix the compensation of our executive officers and non-employee directors. The Board has delegated this authority to the Compensation Committee as provided in the Compensation Committee’s charter. Per its charter, the Compensation Committee annually reviews and approves the goals and objectives relevant to our CEO’s compensation, evaluates his performance in light of those goals and objectives and other criteria, and, either as a committee or together with the other independent directors (as directed by the Board), determines and approves our CEO’s compensation based on the evaluation. The Compensation Committee also evaluates, in conjunction with our CEO, the performance of our senior executive management, and reviews and approves their compensation.
 
The Compensation Committee exercises the Board’s authority with respect to our employee compensation and benefits plans (including our employee equity compensation plans) and policies, except to the extent that the Board, in its discretion, reserves its authority. This delegation includes the authority to select eligible participants, recommend and approve grants and awards, set performance targets and other award eligibility criteria, approve an aggregate incentive pool for any annual or long-term incentive awards, interpret the plans’ terms, delegate certain responsibilities and adopt or modify as necessary any rules and procedures to implement the plans, including any rules and procedures that condition the approval of grants and awards. The Compensation Committee also periodically reviews our compensation and benefit plans and, from time to time, will recommend to the Board new material plans or modifications to existing plans. The Compensation Committee’s exercise of this authority, including specific considerations applied and determinations made, with respect to the compensation and benefits awarded to our named executive officers under our plans is discussed below under the heading “Compensation Discussion and Analysis.”
 
The Compensation Committee, from time to time, reviews and makes recommendations to the Board regarding non-employee director compensation and benefits consistent with the goals of recruiting the highest caliber directors to serve on the Board, aligning directors’ and stockholders’ interests, and fairly paying directors for the work required to serve stockholder interests given our size, scope and complexity of operations.

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In its oversight of executive officer and non-employee director compensation, the Compensation Committee seeks assistance from our management and has engaged an outside compensation consultant, Semler Brossy Consulting Group LLC (“Semler Brossy”), as further described below under the heading “Compensation Discussion and Analysis.” The Compensation Committee may delegate to a subcommittee or to our management any duties and responsibilities as the Compensation Committee deems to be appropriate and in our best interests, but it cannot delegate to our management the authority to grant equity-based awards.
 
Compensation Committee Interlocks and Insider Participation. All current Compensation Committee members served throughout our 2009 fiscal year. No member of the Compensation Committee during our 2009 fiscal year was part of a “compensation committee interlock” as described under SEC rules. In addition, none of our executive officers served as a director or member of the compensation committee of another entity that would constitute a “compensation committee interlock.”
 
Nominating/Governance Committee. The Nominating/Governance Committee is responsible for (a) providing oversight of our corporate governance policies and practices; (b) identifying, evaluating and recommending to the Board individuals who are qualified to become directors; and (c) performing ongoing assessments of the Board’s size, operations, structure, needs and effectiveness. The Nominating/Governance Committee also reviews and makes recommendations to the full Board on proposed changes to our Certificate of Incorporation and By-laws, periodically assesses and recommends action with respect to stockholder rights plans and other stockholder protections, reviews and approves or ratifies (as applicable) “related party transactions,” as further described below under the heading “Certain Relationships and Related Party Transactions,” and is charged with the duties and responsibilities listed in its charter.
 
The Board has determined that each current member of the Nominating/Governance Committee is independent under our Corporate Governance Principles and NYSE listing standards.
 
Director Qualifications
 
We believe our directors should possess the highest personal and professional ethics, integrity, judgment and values, and be committed to representing the long-term interests of our stockholders. Our directors should also have an inquisitive and objective perspective, and be able and willing to dedicate the time necessary to Board and Board Committee service.
 
The Nominating/Governance Committee regularly assesses the skills and characteristics of current and potential directors and may consider the attributes listed to the right, among others.
 
The Nominating/Governance Committee and the Board determined that each individual that the Board will present at the Annual Meeting as a director nominee possesses the characteristics described above in the first paragraph under the heading “Director Qualifications,” as well as certain specific qualifications, which are described below with other biographical information under “Proposal 1: Election of Directors.”
 
 
 
 
Selected Director Attributes
 
•   Personal qualities, accomplishments and reputation in the business community
 
•   Financial literacy, financial and accounting expertise and significant business, academic or government experience in leadership positions or at senior policy-making levels
 
•   Geographical representation in areas relevant to our business
 
•   Diversity of background and personal experience
 
•   Fit of abilities and personality with those of current and potential directors in building a Board that is effective, collegial and responsive to the needs of our business
 
•   Independence and an absence of conflicting time commitments
 
 
 


Director Independence
 
We believe that a substantial majority of our directors should be independent. To be independent, the Board must affirmatively determine that a director does not have any material relationship with us based on all relevant facts and circumstances.

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The Board makes independence determinations annually based on information supplied by directors and other sources, the Nominating/Governance Committee’s prior review and recommendation, and certain categorical standards contained in our Corporate Governance Principles. These standards are consistent with NYSE listing standards. The Board has determined that all non-employee directors who served during our 2009 fiscal year and all current director nominees are independent under the Board’s director independence standards. Accordingly, Messrs. Bollenbach, Burkle, Finchem, Jastrow, Johnson, McCaffery, Moonves, and Nogales and Ms. Lora are independent. In addition, the Board has determined that all of the Board Committees are entirely composed of independent directors.
 
In making its independence determinations, the Board considered radio and billboard advertising expenditures we made at market rates with CBS Corporation (at which Mr. Moonves serves as President and Chief Executive Officer). These expenditures were made in the ordinary course of our business and the business of CBS Corporation and fell well within the categorical independence standards contained in our Corporate Governance Principles. Mr. Moonves was deemed to not have a direct or indirect material interest in the expenditures, and did not participate in the transactions in an individual capacity.
 
Consideration of Director Candidates
 
The Nominating/Governance Committee is responsible for identifying and evaluating director candidates based on the perceived needs of the Board at the time made. Director candidate identification and evaluation may occur at regular or special meetings of the Nominating/Governance Committee and at any point during the year. The general qualifications for director candidates are described above under the heading “Director Qualifications,” and attributes that the Nominating/Governance Committee may consider are described above in the box titled “Selected Director Attributes.” Among other attributes, the Nominating/Governance Committee may consider a director candidate’s diversity of background and personal experience. In this context, diversity may encompass a candidate’s particular race, ethnicity, national origin and gender, geographic residency, educational and professional history, community or public service, expertise or knowledge base and/or other tangible and intangible aspects of the candidate’s constitution in relation to the personal characteristics of current directors and other potential director candidates. The Nominating/Governance Committee does not have a formal policy specifying how diversity of background and personal experience should be applied in identifying or evaluating director candidates, and a candidate’s background and personal experience, while important, does not necessarily outweigh other attributes or factors the Nominating/Governance Committee may consider in evaluating any particular candidate. A director candidate’s background and personal experience, however, will be significant in the Nominating/Governance Committee’s candidate identification and evaluation process to help ensure that the Board remains sensitive and responsive to the needs and interests of our homebuyers and other stakeholders. As part of its annual self-evaluation under our Corporate Governance Principles, the Board considers whether the level of diversity of its members is appropriate, and the Nominating/Governance Committee takes the outcome into account when identifying and evaluating director candidates.
 
The Nominating/Governance Committee has retained professional search firms from time to time to assist it with recruiting potential director candidates to the Board based on criteria the Nominating/Governance Committee provides to the firm. These firms help identify, evaluate and select director candidates and are typically paid an agreed upon fee plus expenses for their work. Current directors or other persons may recommend candidates to the Nominating/Governance Committee.
 
Any security holder may recommend a director candidate for the Nominating/Governance Committee’s consideration by submitting the candidate’s name and qualifications to us in care of the Corporate Secretary at the address listed above under the heading “Corporate Governance Highlights.” Director candidates recommended by a security holder are considered in the same manner as any other recommended candidates.

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Director Compensation
 
The Board sets non-employee director compensation based on recommendations from the Compensation Committee. Mr. Mezger is not paid for his service as a director. The Compensation Committee has retained Semler Brossy to assist it with designing our compensation and benefit programs, including our non-employee director compensation program.
 
2003 Director Plan
 
Until July 9, 2009, non-employee director compensation was provided under our 2003 Non-Employee Directors Stock Plan (“2003 Director Plan”), and each non-employee director serving on the Board on the date of our last Annual Meeting (April 2, 2009) received compensation under the terms of the 2003 Director Plan. All compensation described below under “Director Compensation During Fiscal Year 2009” was provided under the terms of the 2003 Director Plan. The key components of the 2003 Director Plan are set forth below.
 
 
     
 
 
2003 Director Plan Key Components
     
 
 
Director Year Compensation. Each non-employee director is entitled to receive:
 
•      An $80,000 cash retainer, paid in four equal quarterly installments during a Director Year; and
 
•      4,000 stock units.
 
 
A “Director Year” is the period
between our annual meetings of
stockholders. The 2009 Director
Year began on April 2, 2009
and ends on March 31, 2010.
 
     
     
Committee Service-Related Compensation.    
 
•      Committee Chair Retainers: Audit Committee: 1,000 stock units; Compensation Committee: 600 stock units; Nominating/Governance Committee: 600 stock units.
 
Equity Elections. Each non-employee director may elect to receive equity-based compensation as follows:
 
•      The cash retainer in stock units or stock options. If stock units are elected, the number of stock units granted is equal to the number of shares of our common stock that can be purchased based on the grant date closing price with 120% of the retainer’s value. If stock options are elected, the number of stock options granted is four times the shares of our common stock that can be purchased based on the grant date closing price with the retainer’s value.
 
•      Stock unit awards in stock options, with the amount granted equal to four times the number of stock units.
 
Description of 2003 Director Plan Stock Units and Stock Options.
 
•      Granted on the date of each annual stockholders meeting. 2003 Director Plan stock options have an exercise price equal to our common stock’s closing price on that date.
 
•      Each 2003 Director Plan stock unit is a right to receive the fair market value of a share of our common stock and a payment at the same time and in the same amount as any cash dividend paid on our common stock. Each stock option granted under the 2003 Director Plan is fully vested at grant and has a 15-year term. A non-employee director cannot exercise 2003 Director Plan stock options until the earlier of (a) meeting the non-employee director stock ownership requirement and (b) the date the director leaves the Board. 2003 Director Plan stock options must be exercised within one year of the date a non-employee director leaves the Board.
 
•      Based on each non-employee director’s compensation election, 2003 Director Plan stock units and stock options will be paid out in cash only. For 2003 Director Plan stock units, the amount paid is equal to the total number of stock units held multiplied by our common stock’s closing price on the date a non-employee director leaves the Board. For 2003 Director Plan stock options, the amount paid is equal to the positive difference between a stock option’s exercise price and the closing price of our common stock on the applicable exercise date. Accordingly, 2003 Director Plan stock options are similar in nature to stock appreciation rights.
 
     

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2009 Director Plan
 
On July 9, 2009, the Board adopted a new non-employee director compensation program – the 2009 Non-Employee Directors Compensation Plan (“2009 Director Plan”). The terms of the 2009 Director Plan are filed as an exhibit to our Annual Report. Similar to the 2003 Director Plan, the 2009 Director Plan provides non-employee directors with an annual retainer and equity-based compensation composed of stock options and stock units. The 2009 Director Plan also provides retainers for Board Committee Chairs and for Board Committee members, and meeting fees payable for attendance at Board or Board Committee meetings, beginning on the third additional meeting of the Board or of a Board Committee above its number of regularly scheduled meetings, subject to approval by the Non-Executive Chairman of the Board (as to Board meetings) or the relevant Board Committee Chair (as to Board Committee meetings). The Non-Executive Chairman of the Board is not eligible for any Board Committee-related retainers.
 
Under the 2009 Director Plan, non-employee directors may elect to receive cash retainers and meeting fees in the form of stock units. 2009 Director Plan stock units and stock options vest one year after the date of grant, and stock options have a 10-year term. A non-employee director cannot exercise vested 2009 Director Plan stock options until the director has met the non-employee director stock ownership requirement or, if earlier, has left the Board. A non-employee director can elect to receive payout of 2009 Director Plan stock units upon leaving the Board or, if the director has met the non-employee director stock ownership requirement, immediately after the one-year vesting date or at a specified date after the stock units vest, but before the director leaves the Board. The non-employee director stock ownership requirement is described below under the heading “Stock Ownership Requirements.” Stock options and stock units granted under the 2009 Director Plan are settled in cash unless payment in shares of our common stock is approved by our stockholders.
 
As of the date of this Proxy Statement, no compensation has been provided to our non-employee directors under the 2009 Director Plan. The Board has established the following compensation under the 2009 Director Plan for the 2010 Director Year: (a) an $80,000 annual retainer; (b) a grant of stock options and stock units, with each valued at $67,500 on the date of grant; (c) Board Committee Chair retainers of $25,000 (Audit Committee), $18,000 (Compensation Committee) and $10,000 (Nominating/Governance Committee); (d) Board Committee member retainers of $10,000 (Audit Committee), $7,000 (Compensation Committee) and $5,000 (Nominating/Committee); and (e) meeting fees, if any, of $1,500 per eligible meeting. The differences between the various Board Committee Chair retainers and Board Committee member retainers reflect the Board’s judgment of each Board Committee’s respective workload.
 
Chairman Retainer
 
Mr. Bollenbach is paid an additional annual cash retainer of $300,000 for his service as the Non-Executive Chairman of the Board. He may keep any retainer payment if removed from the Board without cause.
 
Expenses
 
We pay the non-employee directors’ expenses, including travel, accommodations and meals, for attending Board and Board Committee meetings and our annual stockholders meetings and any other activities related to our business.

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Director Compensation During Fiscal Year 2009
 
                                                   
      Fees Earned or Paid
    Stock
    Option
    All Other
     
      in Cash
    Awards
    Awards
    Compensation 
    Total
Name     ($)(a)     ($)(b)     ($)(b)     ($)(c)     ($)
Mr. Bollenbach
    $ 300,000       $ 0       $ 422,136            $ 0       $ 722,136  
                                                   
Mr. Burkle
      30,567         161,057         430,311         0         621,935  
                                                   
Mr. Finchem
      7,177         183,460         0         16,390         207,027  
                                                   
Mr. Jastrow
      13,192         229,659         0         13,545         256,396  
                                                   
Mr. Johnson
      1,895         14,550         317,621         0         334,066  
                                                   
Ms. Lora
      9,157         214,807         23,674         0         247,638  
                                                   
Mr. McCaffery
      4,392         33,731         475,117         13,545         526,785  
                                                   
Mr. Moonves
      9,011         204,811         38,824         16,390         269,036  
                                                   
Mr. Nogales
      76,753         177,105         5,772         0         259,630  
                                                   
 
(a) Fees Earned or Paid in Cash: Except for Messrs. Bollenbach, Burkle and Nogales, these amounts are the total 2003 Director Plan stock unit dividend equivalent payments made during our 2009 fiscal year. Non-employee directors with larger stock unit holdings based on their tenure and compensation elections received greater dividend equivalent payments. The amount shown for Mr. Bollenbach is solely his Non-Executive Chairman retainer. The amount shown for each of Messrs. Burkle and Nogales includes annual cash retainer payments.
 
(b) Stock and Option Awards: These amounts are the aggregate compensation expense we recognized in our 2009 fiscal year for 2003 Director Plan stock unit and stock option awards, respectively, computed in accordance with Accounting Standards Codification Topic No. 718, “Compensation – Stock Compensation” (“ASC 718”), except that, in accordance with applicable SEC rules and guidance, we have disregarded estimates of forfeitures related to service-based vesting conditions. Information used in determining these amounts can be found in Note 18. Employee Benefit and Stock Plans in the Notes to Consolidated Financial Statements contained in our Annual Report. The stock units and stock options were granted on April 2, 2009. Below are the amounts and corresponding grant date fair value of the stock units and stock options granted to each non-employee director in our 2009 fiscal year per the director’s election and the corresponding grant date fair value computed in accordance with ASC 718.
 
                   
                  Grant Date Fair 
      Stock Units
    Stock Options 
    Value
Name     (#)     (#)     ($)
Mr. Bollenbach
    0     37,993     $339,657
                   
Mr. Burkle
    6,598     16,000     239,041
                   
Mr. Finchem
    10,598     0     154,201
                   
Mr. Jastrow
    10,598     0     154,201
                   
Mr. Johnson
    0     37,993     339,657
                   
Ms. Lora
    11,598     0     168,751
                   
Mr. McCaffery
    0     40,393     361,113
                   
Mr. Moonves
    11,198     0     162,931
                   
Mr. Nogales
    4,000     0     58,200
                   
 
Ms. Lora received an additional 1,000 stock units for her service as Audit Committee Chair. Mr. McCaffery received 2,400 stock options for his service as Compensation Committee Chair by electing to receive his 600 stock unit Chair retainer grant in 2003 Director Plan stock options. Mr. Moonves received an additional 600 stock units for his service as Nominating/Governance Committee Chair. All other stock unit and

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stock option amounts reflect the 2003 Director Plan cash retainer and stock unit grant the non-employee directors elected to receive in 2003 Director Plan stock units or, for Messrs. Bollenbach, Burkle, Johnson and McCaffery, in 2003 Director Plan stock options.
 
Listed below are each non-employee director’s total 2003 Director Plan stock unit and stock option holdings as of February 26, 2010.
 
                   
                  Total  
      Stock Units
    Stock Options
    Holdings  
Name     (#)     (#)     (#)  
Mr. Bollenbach
    0     88,753     88,753
                   
Mr. Burkle
    43,918     181,155     225,073
                   
Mr. Finchem
    31,357     0     31,357
                   
Mr. Jastrow
    55,419     0     55,419
                   
Mr. Johnson
    7,578     37,993     45,571
                   
Ms. Lora
    39,609     11,220     50,829
                   
Mr. McCaffery
    17,568     114,002     131,570
                   
Mr. Moonves
    38,843     18,400     57,243
                   
Mr. Nogales
    68,013     2,130     70,143
                   
 
(c) All Other Compensation: These amounts are the premium payments for the life insurance policies we maintain to fund charitable donations under the Directors’ Legacy Program, which is described below under the heading “Directors’ Legacy Program.” Messrs. Bollenbach and Johnson do not participate in the program. No additional premium payments are currently required for the program donations for each of Messrs. Burkle and Nogales. In our 2009 fiscal year, we paid a total of $59,869 in life insurance premiums for all participants, including former directors. Premium payments vary depending on participants’ respective ages and other factors. The total dollar amount payable under the program at November 30, 2009 was $15.9 million. If all current participating directors were vested in the full donation amount, the total dollar amount payable under the program at November 30, 2009 would have been $16.1 million.
 
Directors’ Legacy Program. We established a Directors’ Legacy Program in 1995 to recognize our and our directors’ interests in supporting worthy educational institutions and other charitable organizations. In making adjustments to our philanthropic activities, the Board elected in 2007 to close the program to new participants. Messrs. Bollenbach, Johnson and Mezger do not participate in the program. Under the program, we will make a charitable donation on each participating director’s behalf of up to $1,000,000. Directors vest in the full donation in five equal annual installments of $200,000, and therefore must serve on the Board for five consecutive years to donate the maximum amount. A participating director may allocate the donation to up to five qualifying institutions or organizations. Donations are paid in ten equal annual installments directly to designated organizations after a participating director’s death with proceeds from the life insurance policies we maintain on each participating director’s life. Participating directors and their families do not receive any proceeds, compensation or tax savings associated with the program.

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Items of Business
 
Proposal 1:
 
Election of Directors
 
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At the Annual Meeting, the Board will present as nominees and recommend to stockholders that Messrs. Bollenbach, Finchem, Jastrow, Johnson, McCaffery, Mezger, Moonves and Nogales and Ms. Lora each be elected as a director to serve for a one-year term ending at our 2011 Annual Meeting of Stockholders. Each nominee is currently a director, has consented to being nominated and has agreed to serve as a director if elected. Each nominee is standing for re-election. Should any of these nominees become unable to serve as a director prior to the Annual Meeting, the persons named as proxies on the proxy cards for the Annual Meeting will, unless otherwise directed, vote for the election of such other person as the Board may recommend in place of such nominee.
 
Mr. Burkle has decided to not seek re-election and will retire from the Board effective as of the date of the Annual Meeting, when his current term as a director expires. On the date of the Annual Meeting, following the election of directors, the Board will have nine members.
 
Vote Required
 
Under our By-laws, the election of each director nominee will require a majority of votes cast at the Annual Meeting to be in favor of the nominee (i.e., the votes cast for a nominee’s election must exceed the votes cast against the nominee’s election).
 
Consistent with this director election standard, our Corporate Governance Principles require that each director nominee in an uncontested election at an annual meeting of stockholders receive more votes cast for than against his or her election or re-election in order to be elected or re-elected to the Board. An “uncontested election” is one in which no director candidates on the ballot were nominated by a stockholder in accordance with our By-laws. This election is an uncontested election.
 
Our Corporate Governance Principles also provide that a director nominee who fails to win election or re-election to the Board in an uncontested election is expected to tender his or her resignation from the Board. If an incumbent director fails to receive the required vote for election or re-election in an uncontested election, the Nominating/Governance Committee will act promptly to determine whether to accept the director’s resignation and will submit its recommendation for consideration by the Board. The Board expects the director whose resignation is under consideration to abstain from participating in any decision regarding that resignation. The Nominating/Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept a director’s resignation.
 
Your Board recommends a vote FOR the election to the Board of each of the nominees.

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A brief summary of each current director’s and director nominee’s principal occupation, recent professional experience, certain specific qualifications identified as part of the Board’s determination that each such individual should serve on the Board, and directorships at other public companies for at least the past five years, if any, is provided below.
 
 
     
Photo of Stephen F. Bollenbach   Stephen F. Bollenbach, age 67, is our Non-Executive Chairman of the Board. He was the Co-Chairman and Chief Executive Officer of Hilton Hotels Corporation, a hotel developer and operator, positions he held from May 2004 and February 1996, respectively. He retired from Hilton in October of 2007. Prior to joining Hilton, Mr. Bollenbach was Senior Executive Vice President and Chief Financial Officer for The Walt Disney Company from 1995 to 1996. Before Disney, Mr. Bollenbach was President and Chief Executive Officer of Host Marriott Corporation from 1993 to 1995, and served as Chief Financial Officer of Marriott Corporation from 1992 to 1993. From 1990 to 1992, Mr. Bollenbach was Chief Financial Officer of the Trump Organization. Mr. Bollenbach serves as a director of Time Warner Inc. and Macy’s, Inc. He previously served as a director of American International Group Inc., Harrah’s Entertainment, Inc., Caesars Entertainment, Inc. and Catellus Development Corporation. Mr. Bollenbach joined the Board as Non-Executive Chairman in 2007. Mr. Bollenbach has several years of experience and expertise as a senior corporate executive and public company board member, including as a lead independent director, and has demonstrated exemplary leadership as Non-Executive Chairman of the Board.
 
     
Photo of Timothy W. Finchem   Timothy W. Finchem, age 62, has been Commissioner of the PGA TOUR, Inc., a membership organization for professional golfers, since 1994. He joined the TOUR staff as Vice President of Business Affairs in 1987, and was promoted to Deputy Commissioner and Chief Operating Officer in 1989. Mr. Finchem served in the White House as Deputy Advisor to the President in the Office of Economic Affairs in 1978 and 1979, and in the early 1980’s, co-founded the National Marketing and Strategies Group in Washington, D.C. He joined the Board in 2005. Mr. Finchem has demonstrated success in broadening the popularity of professional golf among the demographic groups that make up our core homebuyers, and has experience in residential community development. He also has a substantial presence in Florida, one of our key markets.
 
     
Photo of Kenneth M. Jastrow,   Kenneth M. Jastrow, II, age 62, is Non-Executive Chairman, Forestar Group Inc., a real estate and natural resources company. He served as Chairman and Chief Executive Officer of Temple-Inland Inc., a manufacturing company and the former parent of Forestar Group, from 2000 to 2007. Prior to that, Mr. Jastrow served as President and Chief Operating Officer in 1998 and 1999, Group Vice President from 1995 until 1998, and as Chief Financial Officer of Temple-Inland from November 1991 until 1999. Mr. Jastrow is also a director of MGIC Investment Corporation. He previously served as a director of Guaranty Financial Group Inc. He joined the Board in 2001. Mr. Jastrow has several years of experience and leadership in the building products, real estate and mortgage lending industries, providing critical perspective in businesses that impact the homebuilding industry, and on sustainability practices. He also has a substantial presence in Texas, a key market for us.
 
 

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Photo of Robert L. Johnson,   Robert L. Johnson, age 63, is founder and chairman of The RLJ Companies, an innovative business network that owns or holds interests in a diverse portfolio of companies in the banking, private equity, real estate, hospitality, professional sports, film production, gaming, and automobile dealership industries. Prior to forming The RLJ Companies, Mr. Johnson was founder and chief executive officer of Black Entertainment Television (BET), which was acquired by Viacom Inc. in 2001. He continued to serve as chief executive officer of BET until 2006. In July 2007, Mr. Johnson was named by USA Today as one of the 25 most influential business leaders of the past 25 years. Mr. Johnson currently serves on the board of directors of the Lowe’s Companies, Inc., IMG Worldwide, Inc., and Strayer Education, Inc. He previously served as a director of Hilton Hotels Corporation, US Airways Group, Inc. and General Mills, Inc. He joined the Board in 2008. Mr. Johnson has significant experience in real estate, finance, mortgage banking and brand-building enterprises and a unique and diverse background in a number of industry sectors. He also has a substantial presence in the Washington D.C. and mid-Atlantic region, where we have recently resumed operations and that we believe will be an important market for us.
 
     
Photo of Melissa Lora,   Melissa Lora, age 47, has since 2001 been the Chief Financial Officer of Taco Bell Corp., a quick service restaurant chain. Ms. Lora joined Taco Bell Corp. in 1987 and has held various positions throughout the company, most recently acting as Regional Vice President and General Manager from 1998 to 2000 for Taco Bell’s operations throughout the Northeastern United States. She joined the Board in 2004. Ms. Lora has strong knowledge of and substantial experience and expertise in financial matters as well as in managing real estate assets. She has made significant contributions to the work of the Audit Committee since joining the Board and continues to so as its Chair.
 
     
Photo of Michael G. McCaffery,   Michael G. McCaffery, age 56, is the Chief Executive Officer of Makena Capital Management, an investment management firm. From 2000 to 2006, Mr. McCaffery was President and CEO of the Stanford Management Company (SMC), which was established in 1991 to manage Stanford University’s financial and real estate investments. Previous to joining SMC, Mr. McCaffery was President and Chief Executive Officer of Robertson Stephens Investment Bankers from January 1993 to December 1999, and also served as Chairman from January 2000 to December 2000. Mr. McCaffery is a director of Thomas Weisel Partners Group, Inc. and Venture Lending & Leasing V Inc. He previously served as a director of Venture Lending & Leasing IV Inc., Venture Lending & Leasing III Inc., and as a Trustee of RS Investment Trust. He joined the Board in 2003. Mr. McCaffery has a broad array of business experience and recognized expertise in financial matters and real estate investing, as well as a demonstrated commitment to good corporate governance.
 
     
Photo of Jeffrey T. Mezger,   Jeffrey T. Mezger, age 54, has been our President and Chief Executive Officer since November 2006. Prior to becoming President and Chief Executive Officer, Mr. Mezger served as our Executive Vice President and Chief Operating Officer, a position he assumed in 1999. From 1995 until 1999, Mr. Mezger held a number of executive posts in our southwest region, including Division President, Phoenix Division, and Senior Vice President and Regional General Manager over Arizona and Nevada. Mr. Mezger joined us in 1993 as president of the Antelope Valley Division in Southern California. He joined the Board in 2006. As our CEO, Mr. Mezger has demonstrated dedicated and effective leadership, and possesses a unique insight and understanding, of our operations and business strategy.
 
 

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Photo of Leslie Moonves,   Leslie Moonves, age 60, is President and Chief Executive Officer and a Director of CBS Corporation, a mass media company. Prior to that, he was Co-President and Co-Chief Operating Officer of Viacom, a mass media company and the former parent of CBS, which title he held from June 2004 to December 2005. Mr. Moonves previously served as President and Chief Executive Officer of CBS from 1998 to 2004, and served as its Chairman from 2003 to 2005. He joined CBS in 1995 as President, CBS Entertainment. Prior to that, Mr. Moonves was President of Warner Bros. Television from 1993, when Warner Bros. and Lorimar Television combined operations. From 1989 to 1993, he was President of Lorimar Television. He previously served as a director of Viacom Inc. and Westwood One, Inc. He joined the Board in 2004. Mr. Moonves has intimate knowledge of and insight on how to capitalize on trends among, and substantial experience in nationwide marketing to, our target homebuyer demographic.
 
     
Photo of Luis G. Nogales,   Luis G. Nogales, age 66, has been the Managing Partner of Nogales Investors, LLC, a private equity investment firm, since 2001. He was Chairman and Chief Executive Officer of Embarcadero Media, Inc. from 1992 to 1997, President of Univision Communications, Inc., from 1986 to 1988, and Chairman and Chief Executive Officer of United Press International from 1983 to 1986. He is a director of Southern California Edison Co., Edison International and Arbitron Inc. He joined the Board in 1995. Mr. Nogales has substantial depth of experience in media and marketing enterprises and with business operations management and financial investments drawn from a diverse background in an array of industries. His long-time service on the Board has provided critical knowledge of our operations and corporate history.

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Proposal 2:
 
Ratification of Appointment of Independent Registered Public Accounting Firm
 
u
 
The Audit Committee has appointed Ernst & Young LLP as our independent registered public accounting firm to audit our consolidated financial statements for our fiscal year ending November 30, 2010. During our 2009 fiscal year, Ernst & Young LLP served as our independent registered public accounting firm and also provided certain other audit-related services, as further discussed below under the heading “Independent Auditor Fees and Services.” Representatives of Ernst & Young LLP are expected to attend the Annual Meeting, be available to respond to appropriate questions and, if they desire, make a statement.
 
Although we are not required to do so, we are seeking stockholder ratification of Ernst & Young LLP’s appointment as our independent registered public accounting firm as a matter of good corporate governance. If Ernst & Young LLP’s appointment is not ratified, the Audit Committee will reconsider whether to retain Ernst & Young LLP, but still may retain them. Even if the appointment is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in our and our stockholders’ best interests.
 
Vote Required
 
Approval of the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2010 requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting.
 
Your Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2010.

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Proposal 3:
 
Approve the KB Home 2010 Equity Incentive Plan
 
u
 
We are asking for approval of the KB Home 2010 Equity Incentive Plan (the “2010 Plan”), which will allow us to grant equity-based compensation to our employees, consultants and non-employee directors. Upon approval of the 2010 Plan by our stockholders, no further awards will be made under our 2001 Stock Incentive Plan (the “2001 Plan”), which is currently our only active equity compensation plan. The 2001 Plan will otherwise expire in accordance with its terms on April 5, 2011.
 
The 2010 Plan is being submitted to a vote of the stockholders in order to comply with NYSE rules and to allow us to deduct for federal income tax purposes the “performance-based compensation” that is paid under the 2010 Plan, as permitted by Section 162(m) of the Code. Stockholder approval will also allow us to grant incentive stock options under the 2010 Plan.
 
A copy of the 2010 Plan can be found in the accompanying Attachment A, and the following summary of the 2010 Plan’s material terms is qualified in its entirety by reference to the full text. Stockholders are urged to read the full 2010 Plan as set forth in Attachment A.
 
Summary of the 2010 Plan
 
The purpose of the 2010 Plan is to attract, motivate and retain the services of employees, consultants and non-employee directors by enabling them to participate in our growth and financial success through the ownership of equity-based awards, and to align their individual interests to those of our stockholders. The 2010 Plan will become effective only upon approval by our stockholders.
 
Size of the Share Pool. The 2010 Plan authorizes the issuance of 3,500,000 shares of our common stock. This includes the unused capacity that will be rolled-over from the 2001 Plan and that will become subject to the terms of the 2010 Plan. This pool of shares may be used for all types of awards under a fungible pool formula. This formula provides that the authorized share limit will be reduced by (a) one share for every one share subject to a stock option, stock appreciation right (“SAR”) or other similar award, and (b) 1.78 shares for every one share subject to a restricted stock award or other similar “full-value” awards.
 
Key Terms. The 2010 Plan authorizes the Compensation Committee (or, if our Board determines, another committee of independent directors of the Board, which in either case we will refer to in this proposal as the “Committee”) to grant awards and otherwise administer and interpret the 2010 Plan, and any award agreements and general programs adopted thereunder. The 2010 Plan also incorporates a broad range of other leading compensation and governance terms, including the following:
 
  •   No Repricings Without Stockholder Approval. The 2010 Plan prohibits, without stockholder approval, both the amendment of any stock option or SAR to reduce its exercise price and the cancellation of a stock option or SAR in exchange for cash or for any other award that has a lower exercise price or that provides additional value to the holder of a stock option or SAR award.
 
  •   No In-the-Money Grants. The 2010 Plan prohibits the grant of stock options or SARs with an exercise price less than the fair market value of a share of our common stock on the date of grant.
 
  •   Limited Delegation. The Committee may only delegate administrative actions under the 2010 Plan to our officers, and in no event may any officer be delegated the authority to grant or amend awards.
 
  •   Minimum Vesting Requirements. The minimum time-based vesting requirement for performance-based awards is one year, and non-performance-based awards are generally subject to a three year vesting period. The Committee may provide for an equal portion of a non-performance-based award to vest in annual installments during this vesting period. In addition, the 2010 Plan only permits the Committee to accelerate the vesting of an award in the event of a holder’s death, disability or retirement (though only as to employee holders), or upon a change in control.
 
  •   Reissuance Restrictions. Shares that are tendered or withheld to satisfy the exercise price of an award or to cover tax withholding obligations may not be used again for new grants.
 
  •   Limitations on Grants. The maximum number of shares with respect to which one or more awards may be granted to any one person in a given year is 1,000,000. The maximum amount of cash that

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  may be paid to any one person in a given year with respect to one or more performance-based awards is $5,000,000.
 
Eligibility. All employees, non-employee directors and consultants of KB Home and its affiliates are eligible to receive awards under the 2010 Plan, as determined by the Committee or the Board. As of the date of this proxy statement, we have nine non-employee directors and approximately 1,000 employees and consultants who are eligible to participate in the 2010 Plan.
 
Administration. Unless the Board assumes the role of the Committee or otherwise limits the Committee’s authority, the Committee has the power to make grants of awards under the 2010 Plan, to determine the types, sizes, price, timing and vesting restrictions of awards, and to administer and interpret the 2010 Plan. The Committee shall also have the limited power to delegate certain of its powers and responsibilities under the 2010 Plan, subject to the restrictions described above, and only to the extent consistent with our equity-based award grant policy (as described below under the heading “Equity-Based Award Grant Policy”) and applicable law.
 
Types of Awards. The 2010 Plan authorizes the grant of stock options, shares of restricted stock, SARs, restricted stock units, stock payments and general performance-based awards. Following is a brief description of each type of award:
 
  •   Stock Options. Stock options provide a holder with the right to acquire shares of our common stock for the exercise price stated in the award. There are two kinds of stock options: incentive stock options (as defined under Section 422 of the Code) and nonqualified stock options. The option exercise price of all stock options granted pursuant to the 2010 Plan will not be less than 100% of the fair market value of a share of our common stock on the date of grant. Stock options may vest and become exercisable as determined by the Committee, but in no event may a stock option have a term extending beyond the tenth anniversary of the date of grant. In addition, incentive stock options granted to any person who owns stock constituting more than 10% of our total voting power shall have an exercise price of not less than 110% of the fair market value of a share of our common stock on the date of grant and may not have a term extending beyond the fifth anniversary of the date of grant. The aggregate fair market value of the shares with respect to which incentive stock options are exercisable for the first time by an employee in any calendar year may not exceed $100,000, or such other amount as the Code may allow.
 
  •   Restricted Stock. An award of restricted stock is a grant of shares of our common stock that is nontransferable and subject to forfeiture until certain conditions set forth in the award agreement are met. Conditions may be based on continuing service to us or achieving one or more performance goals or other criteria or a combination of criteria. During the restricted period, a holder of shares of restricted stock will have full rights with respect to such shares unless otherwise determined by the Committee, except that no dividends or distributions shall be payable on shares of restricted stock that are subject to the satisfaction of one or more performance goals until such goals are met, at which time accrued but unpaid dividends and distributions shall become payable to the holder.
 
  •   SARs. SARs entitle a holder to receive an amount determined by multiplying (a) the difference between the fair market value of a share of our common stock on the date of exercise and the stated exercise price by (b) the number of shares subject to the award. Settlement of a SAR can be in cash or shares of our common stock (or a combination of both). The exercise price of all SARs granted pursuant to the 2010 Plan will not be less than 100% of the fair market value of a share of our common stock on the date of grant. SARs may vest and become exercisable as determined by the Committee, but in no event may a SAR have a term extending beyond the tenth anniversary of the date of grant.
 
  •   Restricted Stock Units (“RSUs”). RSUs provide for the issuance to a holder of shares of our common stock or an equivalent cash value at a future date upon the satisfaction of specific conditions set forth in the award agreement. Conditions may be based on continuing service to us or achieving one or more performance goals or other criteria or a combination of criteria. RSUs generally will be forfeited if the applicable vesting conditions are not met. RSUs may be paid in cash, shares of our common stock or a combination of both. A holder of RSUs will not have any rights associated with any underlying shares until the vesting conditions are satisfied and shares of our common stock are actually issued.

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  •   Stock Payments. The 2010 Plan provides for the ability to make a payment of shares of our common stock (or a right to purchase shares) as part of a bonus, deferred compensation or other arrangement.
 
  •   Performance-Based Awards. These awards may be granted in the form of cash bonus awards, stock bonus awards, performance awards or incentive awards that are paid in cash, shares of our common stock or a combination of both. The value of these awards will be linked to the achievement of one or more performance goals. In addition, the vesting or payout of any of the other types of awards that may be granted under the 2010 Plan may be made subject to the achievement of one or more performance goals.
 
Cancellation, Forfeiture, Expiration or Cash Settlement of Awards. If an award expires or is canceled, forfeited or settled for cash, then any shares subject to such award may, to the extent of such expiration, cancellation, forfeiture or cash settlement, be used again for new grants under the 2010 Plan. However, as noted above, any shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any award may not be used again for new grants. Any shares that again become available for grant will be added back in the same manner in which they were initially deducted (i.e., one-for-one or 1.78-for-one).
 
Performance-Based Compensation. Awards may be granted to employees who are “covered employees” under Section 162(m) of the Code that are intended to be “performance-based compensation” so as to preserve the tax deductibility of the awards for federal income tax purposes. These performance-based awards may be either equity or cash awards, or a combination of both. Holders are only entitled to receive payment for a Section 162(m) performance-based award for any given performance period to the extent that pre-established performance goals set by the Committee are satisfied. These pre-established performance goals must be based on one or more of the following performance criteria which are the same criteria our stockholders approved last year for our Annual Incentive Plan for Executive Officers:
 
  •   Income/Loss (e.g., operating income/loss, EBIT or similar measures, net income/loss, earnings/loss per share, residual or economic earnings)
 
  •   Cash Flow (e.g., operating cash flow, total cash flow, EBITDA, cash flow in excess of cost of capital or residual cash flow, cash flow return on investment and cash flow sufficient to achieve financial ratios or a specified cash balance)
 
  •   Returns (e.g., on revenues, investments, assets, capital and equity)
 
  •   Working Capital (e.g., working capital divided by revenues)
 
  •   Margins (e.g., variable margin, profits divided by revenues, gross margins and margins divided by revenues)
 
  •   Liquidity (e.g., total or net debt, debt reduction, debt-to-capital, debt-to-EBITDA and other liquidity ratios)
 
  •   Revenues, Cost Initiative and Stock Price Metrics (e.g., revenues, stock price, total shareholder return, expenses, cost structure improvements and costs divided by revenues or other metrics)
 
  •   Strategic Metrics (e.g., market share, customer satisfaction, employee satisfaction, service quality, orders, backlog, traffic, homes delivered, cancellation rates, productivity, operating efficiency, inventory management, community count, goals related to acquisitions, divestitures or other transactions and goals related to KBnxt operational business model principles, including goals based on a per-employee, per-home delivered or other basis)
 
With respect to particular performance-based awards, the Committee is permitted to make certain equitable and objectively determinable adjustments to the performance goals, provided that any awards that are intended to qualify as “performance-based compensation” must be made in accordance with the requirements of Section 162(m) of the Code. Upon certification of achievement of the performance goals for a particular performance period set forth in an award that is intended to qualify as “performance-based compensation,” the Committee may reduce or eliminate, but not increase, the amount specified in the original award. Generally, a holder of a performance-based award must be employed by or providing services to us throughout an applicable performance period in order to be eligible to receive any payment pursuant to an award that is intended to qualify as “performance-based compensation.”

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Payment Methods. Holders may satisfy any payment obligations associated with awards with (a) cash or a check, (b) shares of our common stock issuable pursuant to the award or held for a sufficient period of time (and without encumbrances) and having a fair market value equal to the required payment, or (c) other acceptable property or legal consideration, as determined by the Committee.
 
Transferability. No award may be transferred other than to certain permitted transferees by will or the laws or descent and distribution or, with the consent of the Committee, pursuant to a domestic relations order.
 
Adjustments. Equitable adjustments to the terms of the 2010 Plan and any awards will be made as necessary to reflect any stock splits, spin-offs, extraordinary stock dividends or similar transactions.
 
Substitute Awards. The 2010 Plan provides for “substitute awards” to be issued if we assume or substitute awards under the 2010 Plan for outstanding equity awards previously granted by another company, whether in connection with a merger, combination, consolidation, acquisition or other corporate transaction. Certain equitable exceptions apply to the terms of the 2010 Plan in order to facilitate the issuance of such awards.
 
Amendment and Termination. The Board or the Committee may terminate, amend or modify the 2010 Plan. However, the additional approval of our stockholders will be required to (a) increase the number of shares of our common stock available for grant, (b) reduce the exercise price of any option or SAR, (c) cancel an option or SAR in exchange for cash or any other award that has a lower exercise price or that provides additional value to the holder, (d) materially modify the requirements for eligibility to participate in the 2010 Plan, (e) materially increase the benefits accruing to participants in the 2010 Plan, or (f) make other material changes that require stockholder approval under applicable stock exchange rules.
 
Term. No new awards may be granted under the 2010 Plan following the tenth anniversary of its approval by our stockholders.
 
Federal Income Tax Consequences
 
If a holder is granted a nonqualified stock option under the 2010 Plan, the holder should not have taxable income on the grant of the option. Generally, the holder should recognize ordinary income at the time of exercise in an amount equal to the fair market value of a share of our common stock at such time, less the exercise price paid. The holder’s basis in the common stock for purposes of determining gain or loss on a subsequent sale or disposition of such shares generally will be the fair market value of our common stock on the date the holder exercises such option. Any subsequent gain or loss generally will be taxable as a capital gain or loss. We generally should be entitled to a federal income tax deduction at the time and for the same amount as the holder recognizes ordinary income.
 
A holder of an incentive stock option will not recognize taxable income upon grant. Additionally, if the applicable employment-related requirements are met, the holder will not recognize taxable income at the time of exercise. However, the excess of the fair market value of our common stock received over the option price is an item of tax preference income potentially subject to the alternative minimum tax. If any of the requirements for incentive stock options under the Code are not met, the incentive stock option will be treated as a nonqualified stock option and the tax consequences described above for nonqualified stock options will apply. Once an incentive stock option has been exercised, if the stock acquired upon exercise is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value on the date of sale and the exercise price) upon disposition of the stock will be treated as a long-term capital gain or loss, and we will not be entitled to any deduction. If the holding period requirements are not met, the excess of the fair market value on the date of exercise over the exercise price (less any diminution in value of the stock after exercise) will be taxed as ordinary income and we will be entitled to a deduction to the extent of the amount so included in the income of the holder. Appreciation in the stock subsequent to the exercise date will be taxed as long term or short term capital gain, depending on whether the stock was held for more than one year after the exercise date.
 
The current federal income tax consequences of other awards authorized under the 2010 Plan generally follow certain basic patterns: SARs are taxed and deductible in substantially the same manner as nonqualified stock options; restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant through an election under Section 83(b) of the Code); RSUs, stock-based performance awards and other types of awards are generally subject to tax at the time of payment based on the fair market value of the award on that date. Compensation otherwise effectively

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deferred is taxed when paid. In each of the foregoing cases, we will generally have a corresponding deduction at the time the holder recognizes income, subject to Section 162(m) of the Code with respect to covered employees.
 
Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to covered employees in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. Qualified “performance-based compensation” is disregarded for purposes of the deduction limitation. The 2010 Plan has been designed to meet the requirements of Section 162(m) of the Code, but it is possible that compensation attributable to awards under the 2010 Plan (when combined with all other types of compensation received by a covered employee from us or because of other factors) may not comply with all of the requirements of Section 162(m) of the Code, thereby preventing us from taking a deduction.
 
2010 Plan Benefits
 
No determination has been made as to the types or amounts of awards that will be granted to specific individuals under the 2010 Plan. Information on equity-based awards recently granted under our existing plans to each of our named executive officers is provided below under the headings “Summary Compensation Table” and “Grants of Plan-Based Awards During Fiscal Year 2009.” Information on equity-based awards recently granted under our existing non-employee director compensation plan to each of our non-employee directors is provided above under the heading “Director Compensation During Fiscal Year 2009.”
 
Vote Required
 
Approval of the 2010 Plan requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. To meet NYSE listing standards, however, more than 50% of the outstanding shares of our common stock must cast a vote on this proposal.
 
 
Your Board recommends that you vote FOR this proposal to approve the KB Home 2010 Equity Incentive Plan.

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Proposal 4:
 
Stockholder Proposal
 
u
 
The Central Laborers’ Pension, Welfare and Annuity Funds, P.O. Box 1267, Jacksonville, IL 62651, the beneficial owner of 1,470 shares of our common stock, has notified us that it intends to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal or the proponent’s supporting statement.
 
Stockholder Proposal
 
RESOLVED: That the shareholders of KB Home (“Company”) request that the Board of Director’s Executive Compensation Committee adopt a Pay for Superior Performance principle by establishing an executive compensation plan for senior executives (“Plan”) that does the following:
 
  •   Sets compensation targets for the Plan’s annual and long-term incentive pay components at or below the peer group median;
 
  •   Delivers a majority of the Plan’s target long-term compensation through performance-vested, not simply time-vested, equity awards;
 
  •   Provides the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the Plan;
 
  •   Establishes performance targets for each Plan financial metric relative to the performance of the Company’s peer companies; and
 
  •   Limits payment under the annual and performance-vested long-term incentive components of the Plan to when the Company’s performance on its selected financial performance metrics exceeds peer group median performance.
 
Proponent’s Supporting Statement
 
We feel it is imperative that executive compensation plans for senior executives be designed and implemented to promote long-term corporate value. A critical design feature of a well-conceived executive compensation plan is a close correlation between the level of pay and the level of corporate performance. The pay-for-performance concept has received considerable attention, yet all too often executive pay plans provide generous compensation for average or below average performance. We believe the failure to tie executive compensation to superior corporate performance has fueled the escalation of executive compensation and detracted from the goal of enhancing long-term corporate value.
 
We believe that the Pay for Superior Performance principle presents a straightforward formulation for senior executive incentive compensation that will help establish more rigorous pay for performance features in the Company’s Plan. A strong pay and performance nexus will be established when reasonable incentive compensation target pay levels are established; demanding performance goals related to strategically selected financial performance metrics are set in comparison to peer company performance; and incentive payments are awarded only when median peer performance is exceeded.
 
We believe the Company’s Plan fails to promote the Pay for Superior Performance principle in several important ways. Our analysis of the Company’s executive compensation plan reveals the following features that do not promote the Pay for Superior Performance principle:
 
  •   The company does not target total compensation at any particular level.
 
  •   Substantial bonuses are paid if the company generates a pretax loss, as long as the loss is not more than $300 million.
 
  •   No awards under the company’s long-term incentive plan are performance-vested.
 
  •   The company does not disclose vesting schedules for SARs or phantom shares.

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We believe a plan designed to reward superior corporate performance relative to peer companies will help moderate executive compensation and focus senior executives on building sustainable long-term corporate value. We urge shareholders to vote FOR our proposal.
 
Recommendation of the Board AGAINST the Proposal
 
Your Board recommends a vote AGAINST this proposal, which stockholders rejected by significant margins at both the 2008 annual meeting and the 2009 annual meeting. Your Board continues to believe that the proposal does NOT establish a pay-for-performance plan and, therefore, it does not serve the best interests of KB Home or its stockholders.
 
Your Board shares the proponent’s view that executive incentive compensation should appropriately reward performance that creates and sustains enterprise and stockholder value, and believes that KB Home’s current executive compensation philosophy and programs reflect an appropriate pay-for-performance orientation. These are discussed in detail below under the heading “Compensation Discussion and Analysis.”
 
By requiring KB Home to set incentive compensation targets “at or below peer group median,” however, your Board believes implementing this proposal would seriously undermine incentive pay’s role in promoting value creation for KB Home’s stockholders. Your Board also believes implementation of the proposal would severely impair KB Home’s ability to attract, motivate and retain high-caliber executive talent. Offering only average or below-average pay for delivering above-average results is extremely unlikely to provide an incentive for an individual to join or stay with KB Home, or motivate them to deliver superior results. This is particularly true in the current difficult operating environment for the homebuilding industry.
 
Your Board continues to believe this proposal fails to accomplish what its proponent asserts is a “critical design feature of a well-conceived executive compensation plan” – “a close correlation between the level of pay and the level of corporate performance.” In our view, limiting incentive compensation to a level below the level of performance required to earn it actually creates an unhealthy disconnect between pay and performance. Therefore, your Board believes the executive compensation approach in this proposal is clearly not “well-conceived” based on the proponent’s own standards.
 
Your Board believes that KB Home’s current executive compensation programs and practices, as further discussed below under the heading “Compensation Discussion and Analysis,” provide primarily performance-based pay consistent with the proponent’s compensation “principle,” while enabling KB Home to remain competitive in attracting, motivating and retaining quality executive talent and a solid management team. As a result, your Board does not believe that adopting this proposal is necessary or desirable for KB Home or its stockholders.
 
Vote Required
 
Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.
 
Your Board recommends that you vote AGAINST this proposal.

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Proposal 5:
 
Stockholder Proposal
 
u
 
The New York City Employees’ Retirement System, the New York City Teachers’ Retirement System and the New York City Police Pension Fund, collectively the beneficial owners of 185,194 shares of our common stock, have notified us that they intend to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal or the proponents’ supporting statement.
 
Stockholder Proposal
 
RESOLVED – the shareholders of KB Home recommend that the board of directors adopt a policy requiring that the proxy statement for each annual meeting contain a proposal, submitted by and supported by Company Management, seeking an advisory vote of shareholders to ratify and approve the board Compensation’s Committee Report and the executive compensation policies and practices set forth in the Company’s Compensation Discussion and Analysis.
 
Proponent’s Supporting Statement
 
Investors are increasingly concerned about mushrooming executive compensation especially when it is insufficiently linked to performance. In 2009, shareholders filed close to 100 “Say on Pay” resolutions. Votes on these resolutions averaged more than 46% in favor, and more than 20 companies had votes over 50%, demonstrating strong shareholder support for this reform.
 
Investor, public and legislative concerns about executive compensation have reached new levels of intensity. A 2009 report by The Conference Board Task Force on Executive Compensation, noting that pay has become a flashpoint, recommends taking immediate and credible action “in order to restore trust in the ability of boards to oversee executive compensation” and calls for compensation programs which are “transparent, understandable and effectively communicated to shareholders.”
 
An Advisory Vote establishes an annual referendum process for shareholders about senior executive compensation. We believe this vote would provide our board and management useful information about shareholder views on the company’s senior executive compensation especially when tied to an innovative investor communication program.
 
Over 25 companies have agreed to an Advisory Vote, including Apple, Ingersoll Rand, Microsoft, Occidental Petroleum, Hewlett-Packard, Intel, Verizon, MBIA and PG&E. And nearly 300 TARP participants implemented the Advisory Vote in 2009, providing an opportunity to see it in action.
 
Influential proxy voting service RiskMetrics Group, recommends votes in favor, noting: “RiskMetrics encourages companies to allow shareholders to express their opinions of executive compensation practices by establishing an annual referendum process. An advisory vote on executive compensation is another step forward in enhancing board accountability.”
 
A bill mandating annual advisory votes passed the House of Representatives, and similar legislation is expected to pass in the Senate. However, we believe companies should demonstrate leadership and proactively adopt this reform before the law requires it.
 
We believe existing SEC rules and stock exchange listing standards do not provide shareholders with sufficient mechanisms for providing input to boards on senior executive compensation. In contrast, in the United Kingdom, public companies allow shareholders to cast a vote on the “directors’ remuneration report,” which discloses executive compensation. Such a vote isn’t binding, but gives shareholders a clear voice that could help shape senior executive compensation.
 
We believe voting against the election of Board members to send a message about executive compensation is a blunt, sledgehammer approach, whereas an Advisory Vote provides shareowners a more effective instrument.

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We believe that a company that has a clearly explained compensation philosophy and metrics, reasonably links pay to performance, and communicates effectively to investors would find a management sponsored Advisory Vote a helpful tool.
 
Recommendation of the Board AGAINST the Proposal
 
Your Board recognizes the importance of communicating with stockholders about executive pay. Because your Board believes this proposal would not enhance its interaction with stockholders, however, it recommends a vote AGAINST the proposal, which stockholders rejected at KB Home’s 2009 annual meeting.
 
Your Board takes stockholders’ views seriously and is committed to maintaining an open dialogue on KB Home’s business and affairs. In the past few years, your Board has adopted a number of corporate governance reforms in response to sound stockholder suggestions and as best practices. It has also enhanced the transparency of corporate governance processes and decision-making. For example, your Board believes the “Compensation Discussion and Analysis” below provides a considerable amount of information on KB Home’s executive pay philosophy, programs and determinations, and on the Board’s oversight of those subjects.
 
Stockholders have many ways to communicate directly to the Board and to management their specific ideas or concerns regarding executive pay or other matters. These include contacting the Board, the Compensation Committee, and/or individual directors through the Corporate Secretary, as described above under the heading “Corporate Governance Highlights,” and contacting KB Home’s investor relations professionals. Your Board believes these are effective channels for stockholders to fully express their views on executive pay or corporate governance.
 
As with last year’s proposal, the proponents do not explain how the proposed advisory vote would specifically benefit KB Home and its stockholders over current communication channels or otherwise strengthen KB Home’s corporate governance or the Board’s oversight of executive pay. After careful consideration, your Board believes the proposed “up-or-down” advisory vote would not be helpful because it would not provide useful information or actionable feedback. In addition, compared to the ways stockholders may currently communicate with the Board, your Board believes the proposed advisory vote (if adopted) could actually hinder constructive dialogue with stockholders about executive pay.
 
The outcome of an advisory vote would not identify the particular aspects of executive pay that stockholders like or don’t like, nor specify what should be changed, if anything. It would also not provide any information on why stockholders voted “for” or “against” the Compensation Committee’s Report and the executive compensation policies and practices set forth in the Compensation Discussion and Analysis. Without knowing the reasons for a particular outcome or having any way to assess the likely diverse, and possibly conflicting, stockholder preferences and motivations, your Board could not, consistent with its fiduciary duties to all stockholders, effectively respond to stockholders who voted one way or the other. Accordingly, your Board believes the proposed advisory vote would not help it or the Compensation Committee carry out their executive pay oversight role or improve KB Home’s corporate governance.
 
Moreover, given the significant legislative and regulatory momentum to establish a mandatory advisory vote for all U.S. public companies, your Board believes it is prudent and in the best interests of stockholders to evaluate adopting an advisory vote mechanism when definitive rules are established.
 
Vote Required
 
Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.
 
Your Board recommends that you vote AGAINST this proposal.

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Proposal 6:
 
Stockholder Proposal
 
u
 
The New York City Fire Department Pension Fund and the New York City Board of Education Retirement System, collectively, the beneficial owners of 10,505 shares of our common stock, have notified us that they intend to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal.
 
Stockholder Proposal
 
WHEREAS, in 2002, United States Congress, the Securities and Exchange Commission, and the stock exchanges, recognizing the urgent need to restore public trust and confidence in the capital markets, acted to strengthen accounting regulations, to improve corporate financial disclosure, independent oversight of auditors, and the independence and effectiveness of corporate boards; and
 
WHEREAS, we believe these reforms, albeit significant steps in the right direction, have not adequately addressed shareholder rights and the accountability of directors of corporate boards to the shareholders who elect them; and
 
WHEREAS, we believe the reforms have not addressed a major concern of institutional investors — the continuing failure of numerous boards of directors to adopt shareholder proposals on important corporate governance reforms despite the proposals being supported by increasingly large majorities of the totals of shareholder votes case for and against the proposals;
 
WHEREAS, the Board of Directors of our company has not adopted shareholder proposals that were supported by majority votes;
 
NOW, THEREFORE, BE IT RESOLVED: That the shareholders request the Board of Directors initiate the appropriate process to amend the Company’s governance documents (certificate of incorporation or by-laws) to establish an engagement process with the proponents of shareholder proposals that are supported by a majority of the votes cast, excluding abstentions and broker non-votes, at any annual meeting.
 
In adopting such a policy, the Board of Directors should include the following steps:
 
  •   Within four months after the annual meeting, an independent board committee should schedule a meeting (which may be held telephonically) with the proponent of the proposal, to obtain any additional information to provide to the Board of Directors for its reconsideration of the proposal. The meeting with the proponent should be coordinated with the timing of a regularly scheduled board meeting.
 
  •   Following the meeting with the proponent, the independent board committee should present the proposal with the committee’s recommendation, and information relevant to the proposal, to the full Board of Directors, for action consistent with the company’s charter and by-laws, which should necessarily include a consideration of the interest of the shareholders.
 
Recommendation of the Board AGAINST the Proposal
 
Your Board is committed to communicating with stockholders and being responsive to their concerns, and believes that it has established appropriate processes to consider all stockholder proposals. Your Board also believes that it has a demonstrated history of reaching out to stockholders on matters of corporate governance and in particular to stockholders whose proposals have received majority support. Accordingly, your Board believes this proposal to establish a rigid and formal engagement process is unnecessary and would not be in the best interests of stockholders.
 
The Nominating/Governance Committee, which is composed entirely of independent directors, carefully considers all stockholder proposals submitted for a vote at an annual stockholders meeting and makes recommendations to the Board on whether to adopt or oppose them (in whole or in part) based on the best

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interests of all stockholders. It also reconsiders stockholder proposals that receive majority or substantial support at an annual stockholders meeting. Applicable considerations include, among others (a) the appropriateness of the proposal, (b) applicable requirements of KB Home’s Certificate of Incorporation and By-laws, (c) existing and pending legal requirements, including requirements under applicable state corporate law, (d) potential fit or conflict with existing policies, procedures and practices, (e) the impact of implementing the proposal on KB Home’s overall operations, and (f) whether the proposal is likely to appropriately accomplish its stated goals and objectives. This evaluation process may include direct communication with a proponent, as the Nominating/Governance Committee believes is appropriate. Your Board believes the mandatory engagement process set forth in this proposal would not enhance its process for evaluating stockholder proposals.
 
In addition, stockholders have several ways to communicate with the Board, including contacting the Board through the Corporate Secretary (as described above under the heading “Corporate Governance Highlights”), and your Board welcomes any stockholder input on the proposals that are voted on at an annual stockholders meeting.
 
A critical concern about this proposal is that a proponent of a qualifying proposal may not represent the views of most stockholders, including those who cast a vote in favor of the proposal. Stockholders who vote in favor of a proposal may have very different reasons for doing so, which is not addressed by the proposed process. Moreover, your Board believes that all stockholders should have an equal opportunity to advocate and provide information in support of a stockholder proposal if they choose to do so. Special treatment for the proponent undercuts this equal opportunity commitment. This proposal would also effectively disenfranchise stockholders who exercise their legitimate right to affirmatively abstain from voting on a proposal, further demonstrating that this proposal would not serve the best interests of all stockholders.
 
Notwithstanding the proponent’s claims, your Board has proactively engaged with proponents of proposals that received majority support at an annual stockholders meeting. In 2008, your Board adopted a policy to limit senior executive severance benefits to 2.99 times base salary plus bonus in response to a proposal that received majority support at that year’s annual stockholders meeting. In shaping the executive severance policy, your Board, KB Home senior management and outside advisors sought the proponent’s input. In addition, with stockholder support, your Board has adopted a number of leading corporate governance reforms in the last few years, including eliminating “fair price” and supermajority voting provisions from KB Home’s by-laws, and electing a Non-Executive Chairman of the Board.
 
In 2009, the proponent of this proposal submitted a proposal to establish a non-binding advisory vote on named executive officer compensation. Although a majority of votes cast were in favor, the proposal failed to achieve the affirmative vote of the majority of shares of our common stock present and represented at the 2009 annual stockholders meeting, the applicable standard under our by-laws. Based on this outcome and given the significant legislative and regulatory momentum underway at the time of the 2009 meeting and through to the present time to establish a mandatory advisory vote for all U.S. public companies, your Board continues to believe that it is in the best interests of all stockholders to evaluate adopting an advisory vote mechanism when definitive rules are established. Given that context, and in light of your Board’s current approach to and history of considering stockholder proposals and reaching out to stockholders, your Board believes that the formal engagement process advocated by this proposal would have a needless adverse impact on Board-stockholder interaction with respect to corporate governance matters and should not be implemented.
 
Vote Required
 
Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.
 
Your Board recommends that you vote AGAINST this proposal.

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u
 
  u
   
Ownership of KB Home Securities
 
Ownership of Directors and Management
 
The following table shows, as of February 26, 2010, the beneficial ownership of our common stock by each current director and each of the current executive officers named below in the “Summary Compensation Table,” and by all current directors and executive officers as a group. Except as stated in footnote (d) to the table, beneficial ownership is direct and each director and executive officer has sole voting and investment power over his or her shares.
 
             
      Amount and Nature
     
      of Beneficial
    Percent of
 Non-Employee Directors     Ownership (a - e)     Class
Mr. Bollenbach
        *
             
Mr. Burkle
    1,000     *
             
Mr. Finchem
        *
             
Mr. Jastrow
        *
             
Mr. Johnson
        *
             
Ms. Lora
    2,043     *
             
Mr. McCaffery
        *
             
Mr. Moonves
        *
             
Mr. Nogales
    7,400     *
             
 Named Executive Officers
           
             
Jeffrey T. Mezger
    2,539,416     2.81%
             
Wendy C. Shiba
    20,930     *
             
William R. Hollinger
    271,035     *
             
Wendy L. Marlett
    131,951     *
             
Kelly K. Masuda
    56,624     *
             
 All current directors and executive officers as a group (16 people)
    3,096,567     3.42%
             
 
(a) Not shown in the table are the non-employee directors’ equity-based holdings under the Director Plan, which are shown above under the heading “Director Compensation,” and certain equity-based holdings of our named executive officers, which are shown below under “Grants of Plan-Based Awards During Fiscal Year 2009” and “Outstanding Equity Awards at Fiscal Year-End 2009.”
 
(b) Included are shares of common stock that can be acquired within 60 days of February 26, 2010 through the exercise of stock options granted under our employee equity compensation plans in the following amounts: Mr. Mezger 2,179,023; Ms. Shiba 0; Mr. Hollinger 176,058; Ms. Marlett 53,200; and Mr. Masuda 45,000; and all current executive officers as a group 2,398,931.
 
(c) Included are shares of restricted common stock in the following amounts: Mr. Mezger 0; Ms. Shiba 10,930; Mr. Hollinger 10,525; Ms. Marlett 7,287; and Mr. Masuda 5,668; and all current executive officers as a group 41,697.
 
(d) Ms. Lora holds 2,043 shares of our common stock in a trust in which she and her spouse are trustees and sole beneficiaries and over which they jointly exercise voting and investment power.
 
(e) Based on records available to us, Mr. Raymond P. Silcock, our former Executive Vice President and Chief Financial Officer, beneficially owned 30,000 shares of our common stock as of February 26, 2010. Mr. Silcock’s beneficial ownership is not included in the total shown in the above table.
 
Indicates less than one percent ownership.

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Beneficial Owners of More Than Five Percent of Our Common Stock
 
The following table shows each person or entity known to us as of February 26, 2010 to be the beneficial owner of more than five percent of our common stock:
 
             
      Amount and Nature
     
      of Beneficial
    Percent of
 Name and Address of Beneficial Owner     Ownership     Class
FMR LLC and Edward C. Johnson 3d(a)
    13,202,131     14.99%(b)
             
82 Devonshire Street
           
             
Boston, Massachusetts 02109
           
             
             
             
KB Home Grantor Stock Ownership Trust(c)
    11,217,051     12.70%
             
Wachovia Executive Benefits Group
           
             
One West Fourth Street - NC 6251
           
             
Winston-Salem, North Carolina 27101
           
             
             
             
BlackRock, Inc., et al.(d)
    6,181,658     7.02%(b)
             
40 East 52nd Street
           
             
New York, NY 10022
           
             
 
(a) The stock holding information reported in the table above and in this footnote is based solely on an amendment to Schedule 13G dated February 16, 2010 that FMR LLC filed with the SEC to report beneficial ownership of FMR LLC and Mr. Edward C. Johnson 3d, FMR LLC’s Chairman, as of December 31, 2009. The shares are beneficially owned by the following direct or indirect wholly-owned subsidiaries of FMR LLC: (i) Fidelity Management & Research Company (13,025,495 shares), and (ii) Pyramis Global Advisors Trust Company (176,636 shares). FMR LLC and Mr. Edward C. Johnson 3d each have sole dispositive power as to all of the shares reported and, through control of Pyramis Global Advisors Trust Company, sole voting power as to 176,636 shares.
 
(b) These percent of class figures are furnished in reliance on the respective Schedule 13G filings or amended Schedule 13G filings by FMR LLC and Edward C. Johnson 3d, and BlackRock, Inc.
 
(c) The GSOT holds all of the shares of our common stock shown above per a trust agreement with Wachovia Bank, N.A., as trustee. The GSOT shares are held to help us meet certain obligations to employees under our employee benefit plans. Both the GSOT and the trustee disclaim beneficial ownership of the shares reported. The trustee has no discretion over the manner in which the GSOT shares are voted. Under the GSOT trust agreement, employees who hold unexercised options under our employee equity compensation plans will determine how the GSOT shares are voted.
 
The trustee will vote the GSOT shares as directed by those eligible employees who submit voting instructions for the shares. The number of GSOT shares as to which any one employee can direct the vote depends on how many employees submit voting instructions to the trustee. Employees who are also directors cannot vote GSOT shares; therefore, Mr. Mezger cannot direct the vote of any GSOT shares. If all eligible employees submit voting instructions to the trustee, the other named executive officers who are employed by us at the date of the Annual Meeting can direct the vote of the following amounts of GSOT shares: Ms. Shiba 369,316, Mr. Hollinger 1,274,431, Ms. Marlett 523,847, and Mr. Masuda 426,341, and all current executive officers as a group (excluding Mr. Mezger) 3,591,639. Under the GSOT trust agreement, votes on GSOT shares received by the trustee will be held in confidence and will not be disclosed to any person, including to us.
 
(d) The stock holding information reported in the table above and in this footnote is based solely on a Schedule 13G dated January 29, 2010 that BlackRock, Inc., a parent holding company, filed with the SEC to report beneficial ownership as of December 31, 2009. Of the amount reported as beneficially owned, BlackRock, Inc. subsidiaries specified in the Schedule 13G, collectively, had sole voting power as to 6,181,658 shares of our common stock and had sole dispositive power as to 6,181,658 shares.

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Stock Ownership Requirements
 
We have established stock ownership requirements for our non-employee directors and senior management to better align their interests with those of our stockholders. Our Corporate Governance Principles require each of our non-employee directors to own at least $250,000 in value of our common stock or common stock equivalents within five years of joining the Board. For these purposes, a common stock equivalent means any instrument granted to a non-employee director as compensation for the director’s service on the Board reflecting the right to receive a share of our common stock (other than by means of a right to purchase) or a cash payment equal to the value of a share of our common stock.
 
Our Executive Stock Ownership Policy applies to members of our senior management team and requires executives at various levels to own from 6,000 to 150,000 shares, depending on position. Executives are expected to demonstrate meaningful progress toward satisfying their ownership requirement and to comply fully within five years of becoming subject to the policy, or be subject to consequences for non-compliance. The policy, as applied to our named executive officers, is discussed in additional detail below under the heading “Equity Stock Ownership Policy.”

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u
 
  u
   
Executive Compensation
 
Management Development and Compensation Committee Report
 
The Management Development and Compensation Committee of the Board of Directors has reviewed and discussed the following “Compensation Discussion and Analysis” with KB Home management. Based on this review and discussion, the Management Development and Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in this Proxy Statement.
 
Management Development and Compensation Committee
Michael G. McCaffery, Chair
Stephen F. Bollenbach
Timothy W. Finchem
Luis G. Nogales
 
Compensation Discussion and Analysis
 
Overview of Executive Compensation and Benefit Programs and Decision-Making Process
 
The primary objectives of our executive compensation and benefit programs are to attract, motivate and retain a talented management team to execute our KBnxt operational business model. We believe the core Built-to-Ordertm principles of our KBnxt operational business model and our related strategic initiatives provide us with a distinct competitive advantage over other homebuilders. Within this framework, we design named executive officer (“NEO”) and other senior executive compensation and benefits to reward individual contributions to the achievement of our KBnxt strategic goals and sustainable enterprise value. We believe this approach establishes a clear alignment of executive and stockholder interests. In addition, the Compensation Committee will adjust NEO and other senior executive compensation and benefits to the extent it believes is appropriate to take into account recent and expected overall company performance, and broader industry and economic conditions.
 
     
 
 Executive Compensation Decisions – Participants, Factors, Component Mix, and Data Sources
 
     
 
Participants
and
Roles
 
 
Compensation Committee:
 
•   With support from our management and outside advisors, oversees our executive compensation and benefit programs, including our arrangements with our CEO, other NEOs and other senior executives.
   
 
•   Annually reviews and approves the compensation of our CEO, other NEOs and other senior executives based on an evaluation of their performance against pre-approved goals and other factors.
   
 
Independent Compensation Committee Consultant – Semler Brossy:
   
 
•   Provides advice and perspective to the Compensation Committee on executive and non-employee director compensation and benefits.
   
 
•   To maintain its independence and avoid any conflict of interests, may not work directly for our management unless the Compensation Committee pre-approves the work, including fees.
   
 
CEO and Senior Human Resources and Legal Management:
   
 
•   At the Compensation Committee’s request, provides recommendations, input and support on compensation and benefit program design and implementation, and compliance and disclosure requirements. At least annually, our CEO reviews and discusses with the Compensation Committee the overall performance of our senior executive management, excluding himself, and makes recommendations as to their compensation and benefits.
   
 
•   Has retained a compensation consultant, Towers Perrin, for the purpose of providing compensation and benefits related information, analysis and support.
 
     

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 Executive Compensation Decisions – Participants, Factors, Component Mix, and Data Sources (continued)
 
     
 
Key
Factors
 
 
These factors are considered subjectively and no one factor is specifically given more weight than another.
   
 
•   Each executive’s specific roles, responsibilities, performance, experience, and skill set.
   
 
•   The market for comparable jobs.
   
 
•   The existing and expected business environment.
   
 
•   Our overall financial and operational results.
 
     
 
Component
Mix
 
 
The Compensation Committee uses its own judgment in approving compensation and benefit components and levels for each of our NEOs and other senior executives, and does not follow any set formula or set a specific allocation as to any one component. Through this subjective approach, the Compensation Committee generally takes into account (a) the key factors described above; (b) the data sources described below; and (c) the totality of compensation that may be paid through base salary and annual and long-term incentives.
The Compensation Committee’s intent is to calibrate compensation and benefit components so that the overall compensation they may provide to an executive is in line with what the Compensation Committee believes is appropriate. As a result, and because the Compensation Committee has generally weighted NEO and senior executive compensation significantly toward variable, performance-based annual and long-term incentives to align it with stockholder interests, each such executive’s compensation can vary from year-to-year and from other executives’ compensation in any year. To reflect the CEO’s key role in setting and executing long-term business strategies, the Compensation Committee has awarded the CEO a greater proportion of long-term incentives and greater overall compensation compared to our other senior executives.
 
     
 
Data
Sources
 
 
Semler Brossy, our CEO and our senior human resources management provide the Compensation Committee with data to consider when making compensation decisions. Each data source assists the Compensation Committee in making compensation decisions, and no one source is specifically given more weight than another. The Compensation Committee, however, considers individual performance evaluations as a more important input than tally sheet and survey data.
   
 
•   Tally Sheets. Our management typically provides the Compensation Committee with a tally sheet for each member of our senior executive management at the beginning of each fiscal year, and may do so at other times in connection with senior executive management compensation decisions. Depending on when they are provided, the tally sheets may contain up to five years of data on various compensation and benefit components, including base salary and annual and long-term incentives.
   
 
•   General Market and Peer Group Data. Our peer group – which is listed below – consists of other high production home building companies. The Compensation Committee uses peer group and general industry market survey data to get a general sense of whether our executive compensation is reasonable and competitive with the compensation paid to executives with similar responsibilities at companies both within and outside the homebuilding industry that we consider to be similar to us based on revenues and nature of operations. The Compensation Committee does not, however, benchmark or target executive compensation and benefits at any specific level within a general industry or our peer group.
   
 
•   CEO Employment Agreement. The terms of our CEO’s compensation are governed by his Employment Agreement. Under the Employment Agreements, our CEO is to be paid an annual salary of no less than $1 million. He is also eligible to receive an annual incentive and entitled to participate in our long-term incentive compensation arrangements on terms and conditions that are no less favorable than those that apply to our other senior executives. The Board believes the Employment Agreement provides compensation that is in line with CEO compensation practices in the homebuilding industry. Our CEO is the only NEO with whom we have an employment agreement.
 
     

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Peer Group
 
Like us, our peers are engaged in high production home building. Our annual revenues approximate the group median.
   
 
• Beazer Homes
 
• D.R. Horton
 
• Hovnanian Enterprises
 
• Lennar Corporation
 
 
• MDC Holdings
 
• NVR Incorporated
 
• Pulte Homes
 
• Ryland Group
 
 
• Standard Pacific
 
• Toll Brothers
               
 
Compensation in Context: Fiscal Year 2009
 
In our 2009 fiscal year, general economic conditions remained weak and we continued to face challenging and volatile business conditions. Amid significant uncertainty regarding the timing and extent of any meaningful rebound in many housing markets and the overall economy, our primary strategic goals for the year were generating cash and maintaining a strong balance sheet; restoring the profitability of our homebuilding operations; and positioning our business to capitalize on a housing market recovery when it occurs. We believe we made substantial progress in 2009 towards achieving each of these goals.
 
We sustained the financial strength and flexibility we had entering 2009, ending the year with $1.29 billion of cash, cash equivalents and restricted cash and a lower overall debt level compared to year-end 2008. With regard to profitability, we significantly narrowed our net loss to $101.8 million in 2009 from $976.1 million in 2008, despite the difficult market conditions. With regard to positioning our business for future growth, we continued our nationwide roll-out of affordable, value-engineered new product designs, particularly our The Open Series line, which helped us generate a year-over-year increase in net orders compared to our 2008 results. We also strategically re-entered the Washington, D.C. metropolitan market and continued to adjust our operational infrastructure to focus resources on the markets we see as having strong long-term growth prospects. Our Annual Report provides further details on our 2009 fiscal year performance. Given the tough and uncertain business conditions, we structured our 2009 executive compensation and benefit programs to retain and motivate, in a cost-effective manner, our senior executive management team to promote optimal execution on our primary strategic goals. Below is additional information and analysis regarding our 2009 programs and the specific arrangements we have with our NEOs.
 
NEO Compensation for the 2009 Fiscal Year
 
       
NEO Compensation and
     
Benefit Components     Description/Purpose
Base Salary
    Semi-monthly cash payments that provide competitive fixed income for performance of day-to-day position responsibilities.
       
Annual Incentives
    Lump sum cash payments made after a relevant fiscal year to build accountability and reward achievement of annual business goals.
       
Long-Term Incentives
    Stock- or cash-settled common stock options/SARs/restricted stock/phantom shares that are designed to promote retention and align executive compensation and stockholder value creation over a multi-year time period.
       
Executive Health Benefits
    Provide 100% reimbursement of qualified out-of-pocket medical, dental and vision expenses.
       
Executive Death Benefits
    Provide a death benefit to an executive’s beneficiary through a Death Benefit Only Plan through company-owned life insurance policies. That plan was closed to new participants in 2004 and now the benefit is provided through company-paid term life insurance.
       
Deferred Compensation Plan
    Permits deferred receipt of earned compensation into a non-qualified savings plan similar to our 401(k) Savings Plan; we match dollar-for-dollar deferrals under this plan and our 401(k) Savings Plan up to a total of six percent of base salary.
       
Retirement Plan (closed)
    Provides an annuity benefit after retirement; not all NEOs participate in the plan and no participants have been added to the plan since 2004.
       

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Mix and Levels of NEO Compensation Components
 
Base Salaries. Base salary is a fixed element of compensation for our CEO and our other NEOs. The Compensation Committee annually reviews and may approve NEO base salary adjustments based on a number of factors, including each NEO’s experience and specific responsibilities; individual performance and expectations; our current and expected financial and operational results; equity of salary relative to our executives who are at the same internal management level; market rates to ensure competitiveness; our general budgetary guidelines for base salary increases as set by the Compensation Committee; and our overall financial and operational results. Based on its subjective weighing of these considerations, the Compensation Committee maintained our salary levels at the 2008 rates for all NEOs as well as other senior management. The CEO recommended, and the Compensation Committee agreed, that salary increases for 2009 would be made only to retain non-executive employees and consist only of market-level merit increases or adjustments to address below-market salaries.
 
Annual Incentives. For 2009, each of our NEOs, except Mr. Silcock, was eligible for an annual incentive if at least one of two objective performance goals was achieved. The Compensation Committee, however, had the discretion to reduce or eliminate the actual payout of annual incentives based on our overall performance, an NEO’s individual performance, or other factors, including the factors described above under the heading “Executive Compensation Decisions – Participants, Factors, Component Mix, and Data Sources.” In approving the terms of the annual incentives for our NEOs, which was done at the beginning of 2009, the Compensation Committee sought to balance the need to retain and appropriately motivate our NEOs with the objective of containing overall compensation expense given the business environment. These annual incentives are described below. Mr. Silcock, who joined us in September, was eligible for a guaranteed bonus, as described below under the heading “Guaranteed Bonus.”
 
Each NEO was eligible to receive an annual incentive only if (a) our pretax loss did not exceed $350 million for 2009, excluding inventory impairments and other non-recurring items, or (b) our operating cash flow for 2009 was equal to or above negative $100 million, with the achievement of each of these independent performance goals determined in accordance with U.S. generally accepted accounting principles. If neither goal was achieved, our NEOs were not eligible to receive any annual incentive payout. If either performance goal was achieved, each NEO, except for Ms. Marlett, was eligible to receive their respective maximum annual incentive payout, subject to the Compensation Committee exercising downward discretion (as described above under the heading “Annual Incentives”) in determining the actual payout relative to each NEO’s respective threshold, target and maximum payout levels, which are described below. For Ms. Marlett, if either performance goal was achieved, she was eligible to receive an annual incentive payout in relation to her threshold, target and maximum payout levels described below based primarily on our actual pretax earnings and cash flow results and in part on her personal performance, subject to the Compensation Committee exercising downward discretion in determining the actual payout. Ms. Marlett’s annual incentive was structured differently from the other NEOs’ because she was not a designated executive officer at the time the Compensation Committee approved annual incentives for 2009. The structure of Ms. Marlett’s annual incentive was consistent with those the Compensation Committee approved for executives at her internal management level.
 
The Compensation Committee approved the performance goals to match the NEOs’ annual incentives to our 2009 strategic goals of generating cash and maintaining a strong balance sheet and restoring the profitability of our homebuilding operations. The specific parameters of each performance goal were based on our outlook at the time the annual incentives were approved, which reflected our expectations of an extremely difficult and volatile housing market and recessionary economic conditions throughout 2009. In addition, our corresponding strategic initiatives contemplated lower overall homes delivered and revenues compared to prior years as a result of repositioning and streamlining our operations and our nationwide roll-out of new product designs. Based on this outlook, the Compensation Committee determined that each of the performance goals was substantially uncertain to be met and would, to the extent achieved, represent a strong performance result for the year.
 
For the 2009 annual incentives, the Compensation Committee approved potential threshold, target and maximum payout levels for our CEO and for each of our NEOs equal in each case to a specified percentage of their annual base salary. For our CEO, the payout levels were 50%, 200% and 400%, respectively. For

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Ms. Shiba, the payout levels were 23%, 90% and 180%, respectively. For Messrs. Hollinger and Masuda, the payout levels were 20%, 80% and 160%, respectively. For Ms. Marlett, the payout levels were 20%, 80% and 148%, respectively. The annual incentive payout levels for our NEOs corresponded to each executive’s respective internal management level. The Compensation Committee believes the relatively higher potential payouts that it approved for our CEO’s annual incentive compared to the annual incentives it approved for our other NEOs appropriately reflect Mr. Mezger’s unique and critical role in setting and directly overseeing the implementation of our overall operating strategy and significant related strategic initiatives, his broader responsibilities for driving our overall financial and operational performance, and his wide-ranging internal and external duties across all areas of our business.
 
The Compensation Committee determined that both objective performance metrics for the 2009 NEO annual incentives were achieved, with a 2009 pretax loss, excluding inventory impairments and other non-recurring items, of $67.2 million and 2009 operating cash flow of $349.9 million. Based on these results, each NEO was eligible for an annual incentive payout at the NEO’s respective maximum payout level as follows: Mr. Mezger $4.0 million; Ms. Shiba $822,600; Mr. Hollinger $584,000; Ms. Marlett $481,000; and Mr. Masuda $496,000. The maximum payout amount for Ms. Marlett also includes her achieving the personal performance component of her annual incentive, as further discussed in the paragraph below.
 
In approving the NEOs’ actual annual incentive payouts, the Compensation Committee on a subjective basis took into account the strong performance we achieved relative to the goals set at the beginning of the year and also determined that each NEO delivered strong individual performance in a challenging business environment. With respect to Mr. Mezger, the Compensation Committee, with the Board’s approval, considered the significant and effective leadership he provided in directing the progress made towards achieving our key strategic goals for 2009, which encompassed, among other things, implementing a successful nationwide roll-out of new product designed to meet current homebuyer needs and interests; measurably improving profit margins and maintaining balance sheet strength and flexibility by managing and reducing costs, land inventory and debt levels; and positioning the organization, geographically and operationally, to achieve future growth as housing market conditions improve.
 
For our NEOs other than our CEO, the Compensation Committee, based in large part on the CEO’s evaluation of them, found that Ms. Shiba provided excellent oversight of our governance, ethics and compliance programs and significant support to the achievement of key financial and operational initiatives, and successfully resolved a number of material litigation matters; Mr. Hollinger provided critical leadership and oversight of our accounting and financial reporting process in serving as our principal financial officer for most of the year, in addition to his duties as our Chief Accounting Officer; Mr. Masuda played a key role in restructuring our debt to reduce the overall amount and extend its maturity, and in helping us to maintain a strong and liquid balance sheet; and Ms. Marlett successfully led our sales and marketing organization to achieve year-over-year net order growth and drove the consumer launch of our new product and new communities, which were instrumental in our 2009 results. Ms. Marlett was determined to have achieved the maximum potential payout under the personal performance component of her annual incentive, and this is reflected in the amount noted above for Ms. Marlett. The Compensation Committee did not apply any specific weighting or formula with respect to the foregoing considerations in determining our NEOs’ final annual incentive payouts.
 
Despite the strong operational and individual performance in 2009, given our overall financial results for the year and business conditions, the Compensation Committee used its discretion to reduce the annual incentive payouts to our NEOs to the following amounts: Mr. Mezger $2,750,000; Ms. Shiba $411,300; Mr. Hollinger $390,000; Ms. Marlett $300,000; and Mr. Masuda $250,000.
 
Guaranteed Bonus. Mr. Silcock received a guaranteed bonus of $200,000 for the 2009 fiscal year that was agreed to when he was hired in September.
 
Long-Term Incentives. We provide long-term incentives to our NEOs that consist primarily of grants of equity-based vehicles settled in cash or stock. Because these awards vest over a three-year time horizon and the value of these incentives is tied to the share price of our common stock, we believe they are performance-based and establish an alignment of NEO and stockholder interests over a long-term horizon. Other objectives the Compensation Committee considered in deciding on the grant vehicles and parameters for our 2010 fiscal year long-term incentives included that the plan be sustainable over time and varied market conditions; reward

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recipients for strong performance in delivering financial and operational results that drive stockholder value creation while reflecting expected position-based contributions and responsibilities; and balance and align stockholder and management interests. These other objectives are reflected in the types and mix of long-term incentives granted and the vesting conditions applied to the grants, as described below. We typically grant long-term incentives in October each year, in conjunction with a regularly scheduled Compensation Committee meeting, for the following fiscal year. Accordingly, the 2010 fiscal year long-term incentives were granted in October 2009.
 
In 2007 and 2008, the Compensation Committee granted to our NEOs cash-settled SARs and phantom shares as long-term incentives because at the time the grants were made there were a limited number of shares of common stock that were available for grant under our existing stockholder-approved equity compensation plans. Except for their cash-settled payout, the SARs and phantom shares granted in 2007 and 2008 mirror the attributes of common stock options and shares of restricted common stock, respectively. With the return in 2009 of a significant number of shares to our existing stockholder-approved equity compensation plans, as discussed in our Annual Report, the Compensation Committee granted 2010 fiscal year long-term incentives to our NEOs and other senior executives and employees in the form of common stock options and shares of restricted common stock.
 
As with the annual base salaries and annual incentives it approved for 2009, the Compensation Committee determined that the 2010 fiscal year long-term incentives should be oriented to emphasize, in a cost-effective manner, the retention and motivation of our top executive talent, those who are critical in driving long-term, sustainable value for our stockholders. In reaching this determination, the Compensation Committee considered that the retention value of our past long-term incentive awards is very low given the sustained downturn in the homebuilding industry and the general economy. This downturn has caused the price of our common stock to fall significantly below the exercise price of most of our outstanding employee stock options. The Compensation Committee also considered that our executives did not exercise options when they could, but instead held options through the downturn. The Compensation Committee believes it is appropriate for executives to have a stake in our long-term success that aligns with rebuilding our market value. To address these circumstances and promote retention while containing compensation expense, the Compensation Committee approved 2010 fiscal year long-term incentives at grant date values that roughly approximated the grant date values for the 2009 fiscal year long-term incentives, although the NEO grants were all slightly less than those made a year ago.
 
Based on these considerations and objectives, the Compensation Committee, with input from Semler Brossy and our CEO (as to our other NEOs and other senior management), granted to our NEOs a combination of common stock options and shares of restricted common stock. The specific amounts granted to our CEO and to the other NEOs are shown below under the heading “Grants of Plan-Based Awards During Fiscal Year 2009.”
 
For each NEO, the number of 2010 fiscal year long-term incentives granted was based on the fair value of the award on the grant date, October 1, 2009, and on a total value the Compensation Committee approved for the NEO, of which, except for our CEO (as discussed below), 75% was allocated to common stock options and 25% was allocated to shares of restricted common stock. The Compensation Committee approved the 75%/25% allocation between common stock options and shares of restricted common stock to establish a strong link between the NEOs’ and stockholders’ interests in long-term value creation as the value of each common stock option increases with increases in the share price of our common stock. At lower management levels, to promote retention the allocation between common stock options and shares of restricted common stock was weighted more towards shares of restricted common stock (from 50% to 100% of the overall grants to individual recipients) and restricted cash grants at the lowest levels of management participants.
 
Mr. Mezger’s long-term incentive value was set at $3,500,000 based on the Compensation Committee’s view that it would appropriately compensate and motivate Mr. Mezger to continue to provide effective leadership and strong performance in developing and executing our long-term business strategy during the current housing market downturn, as the Compensation Committee felt he had in 2009 (see discussion above under the heading “Annual Incentives” with respect to the determination of Mr. Mezger’s 2009 annual incentive payout). Mr. Mezger’s long-term incentive consisted solely of stock options based on the Compensation Committee’s determination that they provide, compared to other equity-based instruments, the best alignment

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of his interests with those of our stockholders’ to meet the present challenges for the homebuilding industry and to enhance our performance relative to other homebuilders over the longer term.
 
For our other NEOs, the Compensation Committee considered a total long-term incentive value set within a range of 100% to 200% of current base salary based on their internal management level. Within this range, the Compensation Committee subjectively approved a dollar value for each NEO based on a number of factors, including the above-described objectives for the 2010 long-term incentives, the NEO’s individual current and expected future performance and role, overall potential compensation cost, and the factors described above under the heading “Executive Compensation Decisions – Participants, Factors, Component Mix, and Data Sources.” Based on these considerations, the Compensation Committee approved for each NEO other than our CEO the following total long-term incentive values: Ms. Shiba $675,000; Mr. Hollinger $650,000; Ms. Marlett $450,000; Mr. Masuda $350,000; and Mr. Silcock $1,200,000 (which he forfeited upon his termination of employment with us).
 
As with the 2009 fiscal year long-term incentives, all 2010 fiscal year long-term incentives were granted without performance-vesting requirements. This is largely because the Compensation Committee believed it could not set meaningful and sustainable long-term performance targets due to a continued uncertain outlook for the housing market and the overall economy. Given the importance of motivating and retaining top executive talent in a difficult business environment, and the Compensation Committee’s view that common stock options are inherently performance-based and performance-motivating incentives that appropriately align the interests of executives and stockholders, the Compensation Committee determined that performance-vesting requirements would not be productive in driving financial and operational results over the performance period for the 2010 fiscal year long-term incentives.
 
CEO Performance Shares. On July 12, 2007, the Compensation Committee granted to Mr. Mezger under his Employment Agreement a long-term incentive award of 54,000 performance shares. The performance shares were to vest, if at all, based on our total stockholder return (“TSR”) over a three-year measurement period ending November 30, 2009, relative to our peer group, as shown in the chart below. Payouts are linearly interpolated between the percentiles indicated below.
 
         
    Payout as a Percentage of
 Relative TSR Percentile Ranking   Performance Shares Granted
 
 
Below the 25th percentile
    0 %
25th percentile
    25 %
50th percentile
    100 %
75th percentile and above
    150 %
 
On January 21, 2010, the Compensation Committee determined that our TSR for purposes of the performance shares fell into approximately the 46th percentile. Accordingly, the Compensation Committee approved Mr. Mezger’s vesting in 48,492 shares of the total 54,000 performance shares originally granted. The amount of any cash dividends that were paid on our common stock during the three-year performance period, were equally and contemporaneously paid to Mr. Mezger on the 54,000 performance shares.
 
To further strengthen the alignment of our CEO’s interests with those of our stockholders, the Compensation Committee has adopted a policy to make the vesting of a majority of any future grants of equity compensation to our CEO contingent on the achievement of one or more long-term objective performance metrics. The metrics may include earnings growth and cash flow or any of the other performance criteria provided in the proposed KB Home 2010 Equity Incentive Plan, which are described above under the heading “Proposal 3: Approve the KB Home 2010 Equity Incentive Plan – Performance-Based Compensation.”
 
Benefits. The majority of our health and welfare benefits are made available to all full-time employees, including our NEOs. During 2009, as in years past, our NEOs also received a supplemental benefit that reimburses them for any qualified out-of-pocket medical, dental and vision expenses which exceed amounts payable under the medical, dental and vision plans. In addition, our NEOs were provided with certain death benefits and participated in our Deferred Compensation Plan and Retirement Plan, each as described below under the heading “Post-Termination Arrangements.” These benefits are offered to attract key executive talent and to promote retention. Mr. Mezger participates in a program under which he is credited with a specific number of vacation hours that remains fixed throughout his employment with us, regardless of actual vacation

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time taken. When his employment with us ends, he is entitled to receive a payout of these vacation hours that is based on his then-current annual base salary.
 
Perquisites. In 2007, we discontinued substantially all perquisites to our NEOs, including automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services. On a few occasions in 2009, family members accompanied NEOs on business trips on a company-chartered aircraft; however, we did not incur any additional incremental cost for this travel. In one instance in 2009, a portion of a company-chartered aircraft business trip for our CEO was deemed to be for a personal purpose, and we incurred an incremental cost of $11,568 for this travel. From time to time, we also made available to our employees, including our NEOs, for their personal use, tickets to certain sporting events purchased as a season subscription for business purposes. We did not incur any additional incremental costs with such use and we have discontinued the practice. In connection with Ms. Shiba’s hiring and relocation from Cleveland to Los Angeles, we agreed to pay for certain relocation expenses and to provide her with a monthly housing cost differential amount through December 2008. In 2009, Ms. Shiba received $86,763 under this arrangement. This amount includes reimbursements related to the sale of her home in Cleveland. In connection with Mr. Silcock’s hiring and relocation from Connecticut to Los Angeles in September 2009, we agreed to reimburse his relocation expenses in accordance with our internal policies and to provide him an allowance of $5,000 per month for temporary housing for up to six months. In 2009, Mr. Silcock received $4,570 under this arrangement.
 
Post-Termination Arrangements
 
Severance Arrangements. Mr. Mezger’s Employment Agreement provides him with certain severance benefits, discussed below under the heading “Potential Payments upon Termination of Employment or Change in Control.”
 
Following a review of executive severance policies at peer homebuilding companies and other similarly sized public companies, the Compensation Committee adopted an Executive Severance Plan in 2007 for non-change in control situations. All of our current NEOs participate in the plan. The plan provides a specified severance benefit ranging from one to two times salary and bonus depending on a participant’s internal management level, as discussed further below under the heading “Potential Payments upon Termination of Employment or Change in Control.”
 
In July 2008, following stockholder approval of an advisory proposal, we adopted a policy under which we will obtain stockholder approval before paying severance benefits to an executive officer under a future severance arrangement in excess of 2.99 times the executive officer’s then-current base salary and target bonus. Future severance arrangements do not include severance arrangements existing at the time we adopted the policy or any severance arrangement we assume or acquire unless, in each case, the severance arrangement is changed in a manner that materially increases its severance benefits. We adopted this policy to underscore our intent to continue to remain below the 2.99 times limit in our future severance arrangements.
 
Other Payments Due Upon Termination of Employment and/or a Change in Control. In addition to the severance arrangements mentioned above, we maintain a Change in Control Severance Plan (“CIC Plan”) that provides participants with certain severance benefits upon a change in control and accelerated vesting of equity awards and benefits under our Death Benefit Only Plan (if a participant also participates in that plan). All of our current NEOs participate in the CIC Plan. The objectives of the CIC Plan are to enable and encourage our management to focus its attention on obtaining the best possible deal for our stockholders in a change in control scenario and to make objective evaluations of all possible transactions, without being distracted by the possible impact such transactions may have on job security and benefits; to promote management continuity; and to provide income protection in the event of involuntary loss of employment. In addition, in the event we experience a change in control, there is accelerated vesting of any unvested benefits under our Deferred Compensation Plan and our Retirement Plan, each of which is discussed below under the heading “Retirement Programs,” and certain of our employee benefit plans, including our equity compensation plans. The payments to which our NEOs may be entitled on termination of their employment and/or if we experience a change in control is further discussed below under the heading “Potential Payments upon Termination of Employment or Change in Control.”

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Death Benefits. Our Death Benefit Only Plan, in which Messrs. Mezger and Hollinger and Ms. Marlett participate, provides a death benefit to the participant’s designated beneficiary of $1 million (plus an additional gross-up amount sufficient to pay taxes on the benefit and the additional amount). We closed the Death Benefit Only Plan to new participants beginning in 2004, and only term life insurance, with a $750,000 benefit level payable to an executive’s designated beneficiaries, has been made available to incoming eligible executives. We maintain this term life insurance benefit for Ms. Shiba and Mr. Masuda, and provided it to Mr. Silcock during 2009. We also maintain a life insurance death benefit for Mr. Mezger of $400,000.
 
Retirement Programs. Our 401(k) Savings Plan, a qualified defined contribution plan, is the only program we offer to all full-time employees that provides post-employment benefits. Our current NEOs and certain other senior executives also participate in an unfunded nonqualified Deferred Compensation Plan, which allows pretax contributions of base salary and annual incentive compensation. We provide a dollar-for-dollar match of Deferred Compensation Plan and 401(k) Savings Plan contributions of up to an aggregate amount of six percent of a participant’s base salary. NEO deferrals under the Deferred Compensation Plan are shown below under the heading “Non-Qualified Deferred Compensation During Fiscal Year 2009.” We offer the Deferred Compensation Plan to give participating executives the ability to defer amounts above the contribution limits applicable to our 401(k) Savings Plan.
 
We maintain a Retirement Plan for certain executives that has been closed to new participants since 2004. Messrs. Mezger and Hollinger and Ms. Marlett participate in the Retirement Plan. The Retirement Plan provides each vested participant with a specific annual dollar amount for 20 years commencing following the later of the participant’s reaching age 55; the tenth anniversary of the date the participant commenced his or her participation; or the termination of the participant’s employment with us. Mr. Mezger’s original annual benefit amount under the Retirement Plan was $450,000. For the other NEO participants, the original annual benefit amount under the Retirement Plan was $100,000. For each participant, the annual benefit amount is increased by the same annual cost-of-living adjustments that are applied to federal social security benefits, starting with the plan year ending November 30, 2006. Vesting generally requires five years of participation and, once vested, the participant is entitled to his or her full benefit. Details of NEO participation in the Retirement Plan are provided below under the heading “Pension Benefits During Fiscal Year 2009.”
 
Other Material Tax and Accounting Implications of the Executive Compensation Program
 
Section 162(m) of the Code generally disallows a tax deduction for compensation over $1 million paid to our highest paid executives unless it is qualifying performance-based compensation. We generally design compensation plans in order to maintain federal tax deductibility for executive compensation under Section 162(m) of the Code, and the Compensation Committee considers the potential Section 162(m) impact when approving the compensation paid to our NEOs. The Compensation Committee recognizes the need to balance tax deductibility benefits with the need to provide effective compensation packages that enhance enterprise and stockholder value creation, however, and will approve compensation that may not be deductible under Section 162(m) of the Code where it believes it is in our and our stockholders’ best interests to do so.
 
Other Compensation Policies
 
Equity Stock Ownership Policy. We have had an executive stock ownership policy since 1998. It is designed to encourage, and has encouraged, our executives to increase their ownership of our common stock over time and to align their interests with our stockholders’ interests. In February 2008, the Compensation Committee amended the policy, as described below.
 
The policy identifies specific levels of stock ownership that designated executives are expected to achieve. The targeted stock ownership levels for our NEOs range from 20,000 to 150,000 shares, depending on position. Executives subject to the policy have five years to achieve these ownership levels and must make meaningful progress every year towards the achievement of these ownership levels. Survey data and multiples of average base salaries per level were used to determine the ownership expected for each position. Share ownership may include shares owned outright by a designated executive, shares owned indirectly through our 401(k) Savings Plan and 60% of unvested restricted stock grants or phantom share rights. Phantom share rights are included so that executives subject to the policy would not be penalized for the limited number of shares that were available for grant under our existing stockholder-approved equity compensation plans at the time the policy was amended. It is assumed that executives will use the cash proceeds they receive from the vesting

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of phantom shares to increase their ownership of our common stock. Once required ownership levels are achieved, they must be maintained throughout the executive’s employment. Our policy provides both financial incentives to achieve ownership requirements as well as material consequences for non-compliance. The Compensation Committee may, from time to time, reevaluate and revise the ownership requirements to account for material changes in stock price. Our NEOs are currently in compliance with the policy.
 
Equity-Based Award Grant Policy. In February 2007, the Compensation Committee adopted a policy that is designed to enhance the process by which we grant equity-based awards, including stock options, SARs, phantom shares and restricted stock, by governing the timing of equity-based awards and establishing certain internal controls over the grant of such awards, as described below.
 
The policy requires that the Compensation Committee (or the Board) approve all grants of equity-based awards, and their terms. The policy does not permit any delegation of granting authority to our management. The grant date of any equity-based award will be the date on which the Compensation Committee met to approve the grant unless a written resolution sets a later date. The exercise price of any stock option award will not be less than the closing price of our common stock on the NYSE on the grant date. All equity-based award grants made in 2009 were made in compliance with the policy and were approved at regularly-scheduled Compensation Committee meetings in January and October 2009, as discussed above under the heading “Long-Term Incentives.”
 
Recovery of Compensation.  Under his Employment Agreement, our CEO is required to repay certain bonus and incentive- or equity-based compensation he receives if we are required to restate our financial statements as a result of his misconduct, consistent with Section 304 of the Sarbanes-Oxley Act of 2002.
 
Summary Compensation Table
 
                                                                                       
                                          Change in
           
                                          Pension Value
           
                                          and
           
                                          Nonqualified
           
                                    Non-Equity
    Deferred
           
                        Stock
    Option
    Incentive Plan
    Compensation
    All Other
     
      Fiscal
    Salary
    Bonus
    Awards
    Awards
    Compensation
    Earnings
    Compensation
    Total
Name and Principal Position     Year     ($)     ($)(a)     ($)(b)     ($)(b)     ($)(c)     ($)(d)     ($)(e)     ($)
Jeffrey T. Mezger
President and Chief Executive Officer
    2009     $ 1,000,000       $ 0       $ 1,137,076       $ 3,310,337       $ 2,750,000       $ 747,377         $83,699         $9,028,489  
                                                                                     
   
2008
      1,000,000         0         1,069,341         4,593,443         2,750,000         141,666         70,482         9,624,932  
                                                                                       
      2007       1,000,000         6,000,000         4,181,624         3,743,258         97,500         388,632         972,604         16,383,618  
                                                                                       
Wendy C. Shiba†
Executive Vice President,
General Counsel and Secretary
    2009       457,000         0         106,230         252,918         411,300         0         122,982         1,350,430  
                                                                                     
   
2008
      456,417         400,000         41,580         41,832         0         0         310,357         1,250,186  
                                                                                       
William R. Hollinger
Senior Vice President and
Chief Accounting Officer
    2009       365,000         0         152,833         259,498         390,000         205,116         31,348         1,403,795  
                                                                                     
   
2008
      363,750         0         106,947         58,853         370,000         25,877         29,784         955,211  
                                                                                     
      2007       347,083         350,000         123,273         107,703         483,000         83,116         121,111         1,615,286  
                                                                                       
Wendy L. Marlett†
Senior Vice President, Sales, Marketing and Communications
    2009       325,000         0         142,069         184,657         300,000         189,507         27,398         1,168,631  
                                                                                       
Kelly K. Masuda
Senior Vice President and Treasurer
    2009       310,000         0         98,441         162,796         250,000         0         23,732         844,969  
                                                                                     
   
2008
      308,958         0         81,186         41,372         250,000         0         20,932         702,448  
                                                                                       
      2007       296,771         100,000         78,837         85,238         355,500         0         96,459         1,012,805  
                                                                                       
Former NEO
                                                                                     
                                                                                       
Raymond P. Silcock*
    2009       136,538         200,000         16,667         87,272         0         0         6,276         446,753  
                                                                                       
 
(a) Bonus: These amounts are guaranteed or discretionary bonuses. Mr. Silcock’s bonus is described above under the heading “Guaranteed Bonus.”
 
(b) Stock Awards and Option Awards: These amounts are the aggregate compensation expense we recognized in our 2009 fiscal year for Stock Awards (shares of restricted stock and phantom shares) and Option Awards (stock options and SARs) granted to our NEOs in 2009 and in prior years, computed in accordance with ASC 718, except that, in accordance with applicable SEC rules and guidance, we have disregarded estimates of forfeitures related to service-based vesting conditions and reversals in excess of amounts previously expensed in 2007 for the NEOs who appeared in the Summary Compensation Table for that year. We account for shares of restricted stock as equity awards for purposes of ASC 718, and the related compensation expense was based on our amortization of their grant-date fair value. The grant-date fair value is equal to the closing price of our common stock on the grant date, except for the performance

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shares granted to Mr. Mezger in July 2007, for which we use a Monte Carlo simulation model to estimate the grant-date fair value. We account for the phantom shares as liability awards for purposes of ASC 718 because they will be settled in cash in the manner described above under the heading “Long-Term Incentives,” and the related compensation expense was calculated based on the price of our common stock on November 30, 2009, which was $13.55. We account for stock options as equity awards for purposes of ASC 718 and the related compensation expense was based on our amortization of their grant-date fair value. Information used in determining these amounts can be found in Note 18. Employee Benefit and Stock Plans in the Notes to Consolidated Financial Statements contained in our Annual Report. We account for SARs as liability awards for purposes of ASC 718 because they will be settled in cash in the manner described above under the heading “Long-Term Incentives,” and the related compensation expense was calculated using the Black-Scholes option-pricing model with the following assumptions as of November 30, 2009, 2008 and 2007, respectively: a risk-free interest rate of .3% to 1.6% (depending on when the specific SAR was granted), 1.2% to 1.6% (depending on when the specific SAR was granted), and 3.1%; an expected volatility factor for the market price of our common stock of 64.3%, 56.7% and 43.9%; a dividend yield of 1.9%, 2.2% and 4.8%; and an expected life of 1.9 to 3.5 years, 2.9 to 4.1 years and 3.7 to 3.9 years (depending on when the specific SAR was granted).
 
(c)  Non-Equity Incentive Plan Compensation: These amounts are the annual incentive compensation the respective NEOs earned based on achieving fiscal year performance goals.
 
(d) Change in Pension Value and Nonqualified Deferred Compensation Earnings: These amounts are the change in present value of accumulated benefits provided under our Retirement Plan. We do not provide above-market or preferential earnings under our Deferred Compensation Plan.
 
(e) All Other Compensation: The amounts shown consist of the following items:
 
  •   Matching 401(k) Savings Plan and Supplemental Deferred Compensation Plan Contributions: We provide a dollar-for-dollar match of Deferred Compensation Plan and 401(k) Savings Plan contributions of up to an aggregate amount of six percent of a participant’s base salary. The respective aggregate 2009, 2008 and 2007 fiscal year matching contributions we made to each NEO (other than Ms. Shiba, Ms. Marlett, and Mr. Silcock) were as follows: Mr. Mezger $57,983, $58,383 and $57,125; Mr. Hollinger $21,913, $21,813 and $20,825; and Mr. Masuda $10,075, $9,300 and $9,550. The respective aggregate 2009 and 2008 fiscal years matching contributions we made to Ms. Shiba were $26,315 and $25,190. The respective aggregate 2009 fiscal year matching contributions we made to Ms. Marlett was $17,963. Mr. Silcock did not participate in the 401(k) Savings Plan.
 
  •   Premium Payments: We paid premiums on supplemental medical expense reimbursement plans and life insurance policies for the benefit of participating executives. These plans and policies are described above under the heading “Benefits.” The respective aggregate premiums we paid in our 2009, 2008 and 2007 fiscal years for each NEO (other than Ms. Shiba Ms. Marlett and Mr. Silcock) for these plans and policies were as follows: Mr. Mezger $14,148, $12,099 and $9,043; Mr. Hollinger $9,435, $7,971 and $5,781; and Mr. Masuda $13,657, $11,632 and $8,552; The aggregate premiums we paid in our 2009 and 2008 fiscal years for Ms. Shiba were $9,904 and $8,464. The respective 2009 premiums we paid for Ms. Marlett and Mr. Silcock were $9,435 and $1,706.
 
  •   Relocation Assistance: In connection with Ms. Shiba’s hiring and relocation from Cleveland to Los Angeles, we agreed to pay for certain relocation expenses and to provide her with a monthly housing cost differential amount through December 2008. In 2009, Ms. Shiba received $86,763 under this arrangement. In connection with Mr. Silcock’s hiring and relocation from Connecticut to Los Angeles in September 2009, we agreed to reimburse his relocation expenses in accordance with our internal policies and to provide him an allowance of $5,000 per month for temporary housing for up to six months. In 2009, Mr. Silcock received $4,570 under this arrangement.
 
  •   Charter Aircraft Use: In one instance in 2009, a portion of a company-chartered aircraft trip for Mr. Mezger was deemed to be for a personal purpose, and we incurred an incremental cost of $11,568 for this travel.
 
  •   2007 Fiscal Year Perquisites and Payments: In our 2007 fiscal year, our NEOs (other than Ms. Shiba) received certain perquisites (including automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services), and certain one-time payments to offset increases

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  in stock option exercise prices following an internal review of our stock option grant practices. We discontinued substantially all such perquisites in July 2007.
 
Ms. Shiba was not an NEO in our 2007 fiscal year. Ms. Marlett, was not an NEO in fiscal years 2007 or 2008. Accordingly, the data for those years has been omitted from the Summary Compensation Table in accordance with SEC guidance.
 
* Mr. Silcock’s employment with us ended on December 14, 2009. Mr. Hollinger served as our principal financial officer during our 2009 fiscal year prior to Mr. Silcock’s joining us on September 9, 2009, and has served as our principal financial officer since December 14, 2009.
 
 
Grants of Plan-Based Awards During Fiscal Year 2009
 
                                                                               
                                    All Other
    All Other
          Grant
                                    Stock
    Option
          Date
                                    Awards:
    Awards:
    Exercise
    Fair
                  Estimated Possible Payouts Under
    Number
    Number of
    or Base
    Value of
                  Non-Equity Incentive Plan Awards     of Shares
    Securities
    Price of
    Stock and
                        of Stock
    Underlying
    Option
    Option
      Grant
    Type of
    Threshold
    Target
    Maximum
    or Units
    Options
    Awards
    Awards
Name     Date(a)     Award     ($)     ($)     ($)     (#)     (#)     ($/Sh)     ($)(b)
Mr. Mezger
    2/19/09     Annual Incentive     $ 500,000       $2,000,000     $ 4,000,000                                          
                                                                               
      10/1/09     Stock Options                                           489,258       $ 15.44       $ 3,500,000  
                                                                               
Ms. Shiba
    2/19/09     Annual Incentive       105,110       411,300       822,600                                          
                                                                               
      10/1/09     Stock Options                                           70,768         15.44         506,250  
                                                                               
      10/1/09     Restricted Stock                                 10,930                             168,750  
                                                                               
Mr. Hollinger
    2/19/09     Annual Incentive       73,000       292,000       584,000                                          
                                                                               
      10/1/09     Stock Options                                           68,147         15.44         487,500  
                                                                               
      10/1/09     Restricted Stock                                 10,525                             162,500  
                                                                               
Ms. Marlett
    2/19/09     Annual Incentive       65,000       260,000       481,000                                          
                                                                               
      10/1/09     Stock Options                                           47,179         15.44         337,500  
                                                                               
      10/1/09     Restricted Stock                                 7,287                             112,500  
                                                                               
Mr. Masuda
    2/19/09     Annual Incentive       62,000       248,000       496,000                                          
                                                                               
      10/1/09     Stock Options                                           36,695         15.44         262,500  
                                                                               
      10/1/09     Restricted Stock                                 5,668                             87,500  
                                                                               
Former NEO
    10/1/09     Stock Options                                           125,810         15.44         900,000  
                                                                               
                                                                               
Mr. Silcock*
    10/1/09     Restricted Stock                                 19,431                             300,000  
                                                                               
 
(a) Grant Date: The grant date for each award is the date the Compensation Committee approved the award. The exercise price for each award is equal to the closing price of our common stock on the date of grant.
 
(b) Grant Date Fair Value of Stock and Option Awards: The grant date fair value for each award is computed in accordance with ASC 718.
 
* Mr. Silcock forfeited his awards upon the termination of his employment with us on December 14, 2009.

42


Table of Contents

 
Outstanding Equity Awards at Fiscal Year-End 2009
 
                                                                                   
            Option Awards     Stock Awards
                                               
Equity
     
                                                Incentive
    Equity
                                                Plan
    Incentive
                                          Market
    Awards:
    Plan Awards:
                                    Number
    Value of
    Number of
    Market or
                                    of Shares
    Shares or
    Unearned
    Payout Value
            Number of
    Number of
                or Units
    Units of
    Shares,
    of Unearned
            Securities
    Securities
                of Stock
    Stock
    Units or
    Shares, Units
            Underlying
    Underlying
                That
    That
    Other
    or Other
            Unexercised
    Unexercised
    Option
          Have
    Have
    Rights That
    Rights That
            Options
    Options
    Exercise
    Option
    Not
    Not
    Have Not
    Have Not
            Exercisable
    Unexercisable
    Price
    Expiration
    Vested
    Vested
    Vested
    Vested
Name     Grant Date     (#)*     (#)(a)*     ($)     Date     (#)*     ($)(b)     (#)(c)*     ($)(d)
Mr. Mezger
    10/30/01       431,122                 $13.95       10/30/16                                          
                                                                                   
      10/30/01       68,878                 13.95       10/30/16                                          
                                                                                   
      2/13/02       102,090                 20.07       2/13/17                                          
                                                                                   
      5/8/02       44,516                 25.63       5/8/17                                          
                                                                                   
      10/7/02       400,000                 21.51       10/7/17                                          
                                                                                   
      10/24/03       74,667                 33.24(e)       10/24/18                                          
                                                                                   
      10/24/03       149,333                 34.05(e)       10/24/18                                          
                                                                                   
      10/22/04       80,750                 40.90       10/22/19                                          
                                                                                   
      10/22/04       119,250                 40.90       10/22/19                                          
                                                                                   
      10/18/05       75,000                 63.77       10/18/15                                          
                                                                                   
      7/12/07       216,700         108,350       36.19       11/30/16(f)                                          
                                                                                   
      7/12/07       216,700         108,350       36.19       7/12/17                                          
                                                                                   
      7/12/07                                                               54,000       $ 731,700  
                                                                                   
      7/12/07                                           55,264       $ 748,827                      
                                                                                   
      10/4/07       91,667         45,833       28.10       10/4/17                                          
                                                                                   
      10/4/07       275,000         137,500       28.10       10/4/17                                          
                                                                                   
      10/2/08       132,606         265,212       19.90       10/2/18                                          
                                                                                   
      10/2/08                                           43,970         595,794                      
                                                                                   
      10/1/09                 489,258       15.44       10/1/19                                          
                                                                                   
Ms. Shiba
    10/4/07       24,590         12,295       $28.10       10/4/17                                          
                                                                                   
      10/4/07                                           10,677       $ 144,673                      
                                                                                   
      10/2/08       26,522         53,042       19.90       10/2/18                                          
                                                                                   
      10/2/08                                           8,794         119,159                      
                                                                                   
      10/1/09                 70,768       15.44       10/1/19                                          
                                                                                   
      10/1/09                                           10,930         148,101                      
                                                                                   
Mr. Hollinger
    7/1/02       58,058                 $26.29       7/1/17                                          
                                                                                   
      10/7/02       60,000                 21.51       10/7/17                                          
                                                                                   
      10/24/03       9,334                 33.24(e)       10/24/18                                          
                                                                                   
      10/24/03       18,666                 34.05(e)       10/24/18                                          
                                                                                   
      10/22/04       24,000                 40.90       10/22/19                                          
                                                                                   
      10/18/05       6,000                 63.77       10/18/15                                          
                                                                                   
      7/12/07       17,108         8,554       36.19       7/12/17                                          
                                                                                   
      7/12/07                                           9,327       $ 126,381                      
                                                                                   
      10/4/07       24,590         12,295       28.10       10/4/17                                          
                                                                                   
      10/4/07                                           10,677         144,673                      
                                                                                   
      10/2/08       26,522         53,042       19.90       10/2/18                                          
                                                                                   
      10/2/08                                           8,794         119,159                      
                                                                                   
      10/1/09                 68,147       15.44       10/1/19